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For an Accountant: How do I calculate the Effective Interest Rate using Table 6-2: Present Value of a Single Sum (for the Principal) and Table 6-4: Present Value of an Ordinary Annuity of 1 (for the Interest) using the trial and error method? Problem: A Company sells 10% bonds having a Maturity Value of $3,000,000 for a carrying value of $2,783,724. The bonds are dated 1/1/2012 and have a maturity date of 5 years. Interest is payable annually on January 1. I do not understand how they arrived at the discounted value of the principal ($1,702,290) and the discounted value of the interest ($1,081,434) to equal the purchase price of $2,783,724.
How do you first find the discounted value of the principal? How do you then find the discounted value of the interest?
Your answer was very helpful but I am not sure of the above. Can you further assist me? Thank you.
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