Question

A $10,000 mortgage bond with a bond interest rate of 12% per year, payable quarterly, was purchased for $8,800. The bond was kept until it was due, a total of 5 years. What is correct equation (PWr-PWd=0) to calculate the rate of return "i*" made by the purchaser of the bond?

Answer 1

Answer:

-8,800 +300 (P/A, i*,20) +10,000 (P/F, i*,20)=0

Explanation:

Given that

Value of the mortgage bond = $10,000

Interest rate = 12% per year

Purchase value = $8,800

Time period = 5 years

Now the correct equation is

-$8,800 +300 (P/A, i ×,20) +10,000 (P/F, i×,20)=0

The $8,800 represents the purchase value

The 20 represents the 5 years × 4 quarters

Interest = $10,000  × 12% ÷ 4 = $300