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What is the effective interest rate on the bonds

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Question - On Jan. 1, 20x1, Red Co. acquires 500,000 face amount, 10%, bonds of Ball Co. for 487,656. Red Co. incurred transaction costs equal to 5% of the face amount of the bonds. The bonds mature on Dec. 31, 20x3 and pay annual interest every Dec. 31. The bonds were quoted at 102 and 104 on Dec. 31, 20x1 and Dec 31, 20x2, respectively. What is the effective interest rate on the bonds and how much is the difference between the interest received and the interest income recognized in 20x2?

Reference no: EM132855058

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