Attached please find Income Statement, Balance Sheet, and Debt footnote (#3) from Chesapeake Energy's 2010 annual report. Answer the following questions. Dollar values in the footnote are NBV's; interest rates are coupon rates.

1. See the 2.5% contingent convertible notes due 2037 (row 18 in footnote 3). Assume that these bonds' par amount is $600. What is these bonds' effective interest rate?

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2010 2009 ($ in millions) $ 307 1,325 102 $ 1,974 947 139 104 3,266 692 24 98 2,446 |||| 38,952 14,469 1,545 3,726 58,692 (26,314) 32,378 35,007 10,005 3,516 3,235 51,763 (25,053) 26,710 1,208 404 60 327 294 1,535 758 37,179 $ 29,914 CURRENT ASSETS: Cash and cash equivalents Accounts receivable Short-term derivative instruments Deferred income tax asset Other current assets Total Current Assets PROPERTY AND EQUIPMENT: Natural gas and oil properties, at cost based on full-cost accounting: Evaluated natural gas and oil properties Unevaluated properties Natural gas gathering systems and treating plants Other property and equipment.. Total Property and Equipment, at Cost Less: accumulated depreciation, depletion and amortization Total Property and Equipment, Net OTHER ASSETS: Investments Long-term derivative instruments Other long-term assets Total Other Assets TOTAL ASSETS CURRENT LIABILITIES: Accounts payable Short-term derivative instruments Accrued interest .... Other current liabilities Total Current Liabilities LONG-TERM LIABILITIES: Long-term debt, net Deferred income tax liabilities Long-term derivative instruments Asset retirement obligations Other long-term liabilities Total Long-Term Liabilities CONTINGENCIES AND COMMITMENTS (Note 4) EQUITY: Chesapeake Stockholders' Equity: Preferred Stock, $0.01 par value, 20,000,000 shares authorized: 7,254,515 and 4,659,515 shares issued and outstanding Common stock, $0.01 par value, 1,000,000,000 shares authorized, 655,251,275 and 648,549,165 shares issued Paid-in capital... Retained earnings Accumulated other comprehensive income (loss), net of tax of $102 million and ($62) million, respectively Less: treasury stock, at cost; 1,221,299 and 877,205 common shares as of December 31, 2010 and 2009, respectively Total Chesapeake Stockholders' Equity Noncontrolling interest Total Equity TOTAL LIABILITIES AND EQUITY $ 2,069 $ 15 191 2,215 4,490 957 27 218 1,486 2,688 ... 12,640 2.384 1,693 301 407 17,425 12,295 1,059 787 282 462 14,885 3,065 466 7 12,194 190 (deficit) 6 12,146 (1,261) (168) 102 (24) (15) 15,264 11,444 897 15,264 12,341 37,179 $ 29,914 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2010 2009 2008 ($ in millions, except per share data) REVENUES: Natural gas and oil sales $ 5,647 $ 5,049 $ 7,858 Marketing, gathering and compression sales 3,479 2,463 3,598 Service operations revenue 240 190 173 Total Revenues 9,366 7,702 11,629 OPERATING COSTS: Production expenses 893 876 889 Production taxes 157 107 284 General and administrative expenses 453 349 377 Marketing, gathering and compression expenses 3,352 2,316 3,505 Service operations expense.. 208 182 143 Natural gas and oil depreciation, depletion and amortization 1,394 1,371 1,970 Depreciation and amortization of other assets 220 244 174 Impairment of natural gas and oil properties ... 11,000 2,800 (Gains) losses on sales of other property and equipment (137) 38 Other impairments 21 130 30 Restructuring costs 34 Total Operating costs 6,561 16,647 10,172 INCOME (LOSS) FROM OPERATIONS 2,805 (8,945) 1,457 OTHER INCOME (EXPENSE): Interest expense (19) (113) (271) Earnings (losses) from equity investees 227 (39) (38) Losses on redemptions or exchanges of debt (129) (40) Impairment of investments (16) (162) (180) Other income 16 11 27 Total Other Income (Expense) 79 (343) (466) INCOME (LOSS) BEFORE INCOME TAXES 2,884 (9,288) 991 INCOME TAX EXPENSE (BENEFIT): Current income taxes 4 423 Deferred income taxes 1,110 (3,487) (36) Total Income Tax Expense (Benefit) 1,110 (3,483) 387 NET INCOME (LOSS) 1,774 (5,805) 604 Net (income) attributable to noncontrolling interest (25) NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE 1,774 (5,830) 604 Preferred stock dividends.... (111) (23) (33) Loss on conversion/exchange of preferred stock. (67) NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS 1,663 $ (5,853) $ 504 EARNINGS (LOSS) PER COMMON SHARE: Basic 2.63 $ (9.57) $ 0.94 Diluted $ 2.51 $ (9.57) $ 0.93 CASH DIVIDEND DECLARED PER COMMON SHARE $ 0.30 $ 0.30 $ 0.2925 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): Basic 631 612 536 Diluted 706 612 545 g= gE ' - CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Debt Our long-term debt consisted of the following at December 31, 2010 and 2009: December 31, 2010 2009 ($ in millions) 364 500 500 300 300 600 1,425 600 670 796 860 1,100 1,100 1,425 600 7.5% senior notes due 2013 7.625% senior notes due 2013. 7.0% senior notes due 2014 7.5% senior notes due 2014 6.375% senior notes due 2015. 9.5% senior notes due 2015.. 6.625% senior notes due 2016 6.875% senior notes due 2016 6.25% euro-denominated senior notes due 2017(a) 6.5% senior notes due 2017 6.25% senior notes due 2018 6.875% senior notes due 2018 7.25% senior notes due 2018 6.625% senior notes due 2020. 6.875% senior notes due 2020 2.75% contingent convertible senior notes due 2035(b) 2.5% contingent convertible senior notes due 2037(b) 2.25% contingent convertible senior notes due 2038(b) Corporate revolving bank credit facility Midstream revolving bank credit facility Midstream joint venture revolving bank credit facility(c) Discount on senior notes(d) Interest rate derivativese) Total notes payable and long-term debt 800 600 800 1,400 500 451 1,378 752 3,612 94 500 451 1,378 763 1,892 (777) 9 12,640 $ 44 (921) 69 12,295 (a) The principal amount shown is based on the dollar/euro exchange rate of $1.3269 to 1.00 and $1.4332 to 1.00 as of December 31, 2010 and 2009, respectively. See Note 9 for information on our related foreign currency derivatives. (b) The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date. The notes are convertible, at the holder's option, prior to maturity under certain circumstances into cash and, if applicable, shares of our common stock using a net share settlement process. One such triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarter by quarter. In the fourth quarter of 2010, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes during the specified period and, as a result, the holders do not have the option to convert their notes into cash and common stock in the first quarter of 2011 under this provision. The notes are also convertible, at the holder's option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note's conversion value in excess of such principal amount. We will pay contingent interest on the convertible senior notes after they have been outstanding at least ten years, under certain conditions. We may redeem the convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. The optional repurchase dates, the common stock price conversion threshold amounts and the ending date of the first six-month period contingent interest may be payable for the contingent convertible senior notes are as follows: CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2010 2009 ($ in millions) $ 307 1,325 102 $ 1,974 947 139 104 3,266 692 24 98 2,446 |||| 38,952 14,469 1,545 3,726 58,692 (26,314) 32,378 35,007 10,005 3,516 3,235 51,763 (25,053) 26,710 1,208 404 60 327 294 1,535 758 37,179 $ 29,914 CURRENT ASSETS: Cash and cash equivalents Accounts receivable Short-term derivative instruments Deferred income tax asset Other current assets Total Current Assets PROPERTY AND EQUIPMENT: Natural gas and oil properties, at cost based on full-cost accounting: Evaluated natural gas and oil properties Unevaluated properties Natural gas gathering systems and treating plants Other property and equipment.. Total Property and Equipment, at Cost Less: accumulated depreciation, depletion and amortization Total Property and Equipment, Net OTHER ASSETS: Investments Long-term derivative instruments Other long-term assets Total Other Assets TOTAL ASSETS CURRENT LIABILITIES: Accounts payable Short-term derivative instruments Accrued interest .... Other current liabilities Total Current Liabilities LONG-TERM LIABILITIES: Long-term debt, net Deferred income tax liabilities Long-term derivative instruments Asset retirement obligations Other long-term liabilities Total Long-Term Liabilities CONTINGENCIES AND COMMITMENTS (Note 4) EQUITY: Chesapeake Stockholders' Equity: Preferred Stock, $0.01 par value, 20,000,000 shares authorized: 7,254,515 and 4,659,515 shares issued and outstanding Common stock, $0.01 par value, 1,000,000,000 shares authorized, 655,251,275 and 648,549,165 shares issued Paid-in capital... Retained earnings Accumulated other comprehensive income (loss), net of tax of $102 million and ($62) million, respectively Less: treasury stock, at cost; 1,221,299 and 877,205 common shares as of December 31, 2010 and 2009, respectively Total Chesapeake Stockholders' Equity Noncontrolling interest Total Equity TOTAL LIABILITIES AND EQUITY $ 2,069 $ 15 191 2,215 4,490 957 27 218 1,486 2,688 ... 12,640 2.384 1,693 301 407 17,425 12,295 1,059 787 282 462 14,885 3,065 466 7 12,194 190 (deficit) 6 12,146 (1,261) (168) 102 (24) (15) 15,264 11,444 897 15,264 12,341 37,179 $ 29,914 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2010 2009 2008 ($ in millions, except per share data) REVENUES: Natural gas and oil sales $ 5,647 $ 5,049 $ 7,858 Marketing, gathering and compression sales 3,479 2,463 3,598 Service operations revenue 240 190 173 Total Revenues 9,366 7,702 11,629 OPERATING COSTS: Production expenses 893 876 889 Production taxes 157 107 284 General and administrative expenses 453 349 377 Marketing, gathering and compression expenses 3,352 2,316 3,505 Service operations expense.. 208 182 143 Natural gas and oil depreciation, depletion and amortization 1,394 1,371 1,970 Depreciation and amortization of other assets 220 244 174 Impairment of natural gas and oil properties ... 11,000 2,800 (Gains) losses on sales of other property and equipment (137) 38 Other impairments 21 130 30 Restructuring costs 34 Total Operating costs 6,561 16,647 10,172 INCOME (LOSS) FROM OPERATIONS 2,805 (8,945) 1,457 OTHER INCOME (EXPENSE): Interest expense (19) (113) (271) Earnings (losses) from equity investees 227 (39) (38) Losses on redemptions or exchanges of debt (129) (40) Impairment of investments (16) (162) (180) Other income 16 11 27 Total Other Income (Expense) 79 (343) (466) INCOME (LOSS) BEFORE INCOME TAXES 2,884 (9,288) 991 INCOME TAX EXPENSE (BENEFIT): Current income taxes 4 423 Deferred income taxes 1,110 (3,487) (36) Total Income Tax Expense (Benefit) 1,110 (3,483) 387 NET INCOME (LOSS) 1,774 (5,805) 604 Net (income) attributable to noncontrolling interest (25) NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE 1,774 (5,830) 604 Preferred stock dividends.... (111) (23) (33) Loss on conversion/exchange of preferred stock. (67) NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS 1,663 $ (5,853) $ 504 EARNINGS (LOSS) PER COMMON SHARE: Basic 2.63 $ (9.57) $ 0.94 Diluted $ 2.51 $ (9.57) $ 0.93 CASH DIVIDEND DECLARED PER COMMON SHARE $ 0.30 $ 0.30 $ 0.2925 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): Basic 631 612 536 Diluted 706 612 545 g= gE ' - CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Debt Our long-term debt consisted of the following at December 31, 2010 and 2009: December 31, 2010 2009 ($ in millions) 364 500 500 300 300 600 1,425 600 670 796 860 1,100 1,100 1,425 600 7.5% senior notes due 2013 7.625% senior notes due 2013. 7.0% senior notes due 2014 7.5% senior notes due 2014 6.375% senior notes due 2015. 9.5% senior notes due 2015.. 6.625% senior notes due 2016 6.875% senior notes due 2016 6.25% euro-denominated senior notes due 2017(a) 6.5% senior notes due 2017 6.25% senior notes due 2018 6.875% senior notes due 2018 7.25% senior notes due 2018 6.625% senior notes due 2020. 6.875% senior notes due 2020 2.75% contingent convertible senior notes due 2035(b) 2.5% contingent convertible senior notes due 2037(b) 2.25% contingent convertible senior notes due 2038(b) Corporate revolving bank credit facility Midstream revolving bank credit facility Midstream joint venture revolving bank credit facility(c) Discount on senior notes(d) Interest rate derivativese) Total notes payable and long-term debt 800 600 800 1,400 500 451 1,378 752 3,612 94 500 451 1,378 763 1,892 (777) 9 12,640 $ 44 (921) 69 12,295 (a) The principal amount shown is based on the dollar/euro exchange rate of $1.3269 to 1.00 and $1.4332 to 1.00 as of December 31, 2010 and 2009, respectively. See Note 9 for information on our related foreign currency derivatives. (b) The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date. The notes are convertible, at the holder's option, prior to maturity under certain circumstances into cash and, if applicable, shares of our common stock using a net share settlement process. One such triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarter by quarter. In the fourth quarter of 2010, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes during the specified period and, as a result, the holders do not have the option to convert their notes into cash and common stock in the first quarter of 2011 under this provision. The notes are also convertible, at the holder's option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note's conversion value in excess of such principal amount. We will pay contingent interest on the convertible senior notes after they have been outstanding at least ten years, under certain conditions. We may redeem the convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. The optional repurchase dates, the common stock price conversion threshold amounts and the ending date of the first six-month period contingent interest may be payable for the contingent convertible senior notes are as follows