A well-known industrial firm has issued $990 bonds that carry 4% nominal annual interest paid semiannually. The bonds mature 20 years from now, at which time the industrial firm will redeem them for face value plus the terminal semiannual interest payment. From the financial pages of your newspaper you learn that the bonds may be purchased for $715 each ($710 for the bond plus a $5 sales commission).What nominal annual rate of return would you receive if you purchased the bond now and held it to maturity 20 years from now?
A well-known industrial firm has issued $990 bonds that carry 4% nominal annual interest paid semiannually. The bonds mature 20 years from now, at which time the industrial firm will redeem them for face value plus the terminal semiannual interest payment. From the financial pages of your newspaper you learn that the bonds may be purchased for $715 each ($710 for the bond plus a $5 sales commission).What nominal annual rate of return would you receive if you purchased the bond now and held it to maturity 20 years from now?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Answer the question no (1)
Transcribed Image Text:A well-known industrial firm has issued $990 bonds that carry 4% nominal annual interest paid semiannually. The bonds mature 20 years
from now, at which time the industrial firm will redeem them for face value plus the terminal semiannual interest payment. From the
financial pages of your newspaper you learn that the bonds may be purchased for $715 each ($710 for the bond plus a $5 sales
commission).What nominal annual rate of return would you receive if you purchased the bond now and held it to maturity 20 years from
now?
Solution:
1. NPW=PW of Benefits - PW of Costs=0
o Interest received every half year is A=$
o Number of compounding period n=
O PW of Benefits=A(P/A, i*, n)+F(P/F,i*,n);
o PW of Costs =
2. Find out i* using trial and error
o Try i=3%: NPW=
o Try i=3.5%: NPW=
o Performing linear interpolation: i*=
3. Find nominal and effective rate:
o Nominal rate r=
o Effective rate iz=
%.
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