Weighted Average Interest Rate

Lesson: Weighted Average Interest Rate

In this lesson, Nick Palazzolo, CPA, brings clarity to the calculation of the weighted average interest rate, an essential concept for understanding the cost of debt. Breaking down each step with a practical example, Nick illustrates how to determine effective annual interest payments using hypothetical bond scenarios. He provides insights into the nuances between interest expense and interest payable, and deciphers how payments towards interest and principal alter the outstanding debt balance over time. By the end of the session, you'll grasp how to calculate the weighted average interest rate and appreciate that it can differ from the stated coupon rate, equipping you with the knowledge to tackle related exam questions with confidence.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Okay. Weighted average interest rate. Now, this is what step one could look like. Hey, I guess there could be a question as well. What's the weighted average interest rate?

It's definitely good to know. Let's see what we've got here. Now, I'm using the same information, but this is unrelated to the question we just saw because it will get you different numbers than what we had. So just take this independent of the previous question, same information. This is the same, right?

Step one, step two. Here's our example. Right information is the same: $10,000 bonds coupon rate of 8%. What's the weighted average interest rate on December 31? All right, let's see.

Well, the effective annual interest payments. We need to calculate what the effective annual interest payments are. And, well, how do we do that? Now, if you remember, if you've taken FAR, if not, no worries. We've talked about bonds.

We've got the interest expense versus interest payable. One is the income statement, one is the balance sheet, and what do we actually pay versus what is accrued? All of that, what is recorded on the income statement versus what is actually paid out here? Effective annual interest payments. Okay, we have ten bonds, $1,000 each.

So we've got $10,000 of bonds times 8%. That means that $800 of interest paid on July 1. The company made a payment of $1,000, which you may have noticed. So that means that $200 of the principal was paid down. Because think about it like your credit card.

Let's say you owed $800 of interest. Anything additional that you pay pays down your principal. As such, after this, we had the original principal, original balance, credit card balance of $10,000. And I'll use credit card as a synonym. Throw it in there just to

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