BSPI Inc.’s 2015 financial statements included the following information in the

Question

BSPI Inc.’s 2015 financial statements included the following information in the long-term debt disclosure note:

Determine the effective interest rate on the bonds.

2015 zero-coupon bond, due in 2030 $575 million.

The disclosure note stated the bonds were issued late in 2010 and have a maturity value of $1,000 million. The maturity value indicates the amount that BSPI will pay bondholders in 2030 is $1,000 for each bond. A zero-coupon bonds pays no cash interest during the term to maturity. The company is "accreting" (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis.

Required:

Determine the effective interest rate on the bonds.

Explanation / Answer

Effective interest rate =[ (Future value /Present value )^1/n] -1

                            = [(1000/ 575 )^1/15 ] - 1

                         = [ (1.73913)^ .06667 ] - 1

                        = 1.0376 - 1

                        = .0376 or 3.76%

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