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dsp73
3 years ago
8

You wish to purchase a $1,000 bond from a friend who needs the money. There are 7 years remaining until the bond matures, and in

terest payments are quarterly. You decide to offer $750.08 for the bond because you want to earn exactly 16% per year compounded quarterly on the investment. What is the annual bond rate of interest?
Business
1 answer:
miv72 [106K]3 years ago
6 0

Answer:

The annual bond rate of interest = 9.8%

Explanation:

<u>A</u> denotes the annual coupon:

750.08 = A(P/A, 16%, 7) + (\frac{1,000}{(1+0.16)}⁷

Annuity factor at 16% at 7 years = 4.039 (By cumulative present value table)

750.08 = 4.039 A + 353.83

4.039 A = 396.25

A = (396.25 ÷ 4.039)

A = 98.11

<u>Calculating annual bond rate:</u>

r = (98.11 ÷ 1,000) × 100

r = 9.811%

The annual bond rate being rounded off is 9.8% (answer).

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