The annual effective yield for Mike's bond is <u>3.20%</u>, which is less than Dave's 3.50%.
<h3>What is the annual effective yield of a bond?</h3>
The annual effective yield is the total return expected from a bond if the bond is held till maturity.
The annual effective yield rate is the rate at which all future expected cash flows are discounted to find out the current value or the price of the bond.
We can use the following Yield to Maturity formula to calculate the annual effective yield rate.
Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
<h3>Data and Calculations:</h3>
Mike's investment:
Quarterly Interest = $3.50 ($100 x 14% x 1/4)
Annual interest = $14 ($100 x 14%)
FV = Face Value of the Bond = $100
Price = Current Market Price of the Bond at Redemption = $150
Maturity = Time to Maturity = 5 years
= {$14 + ($100 - $150)/5} / {($100 + $150)/2}
= $14 + -10 / 250/2
= 4/125
= 3.2%
Thus, the annual effective yield for Mike's bond is <u>3.20%</u>, which is less than Dave's 3.50%.
Learn more about the yield to maturity at brainly.com/question/26657407
