Question

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 interest 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?

Answer 1

Answer:

The annual bond rate of interest = 9.8%

Explanation:

A 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

Calculating annual bond rate:

r = (98.11 ÷ 1,000) × 100

r = 9.811%

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