Answer:
The range of effective rate of return that the purchaser will receive would be between 10.2% - 11.2%. The right answer is a
Explanation:
According to the given data we have the following:
Quarterly dividend = $67.50
Buy price = $2,775
Maturity = 10 yrs = 10*4 = 40 quarters
Face value = $3000
Hence, PW = -2775 + 67.50 * (P/A,i%,40) + 3000*(P/F,i%,40) = 0
67.50 * (P/A,i%,40) + 3000*(P/F,i%,40) = 2775
Therefore, using trail and error method
When i = 2.5%, value of 67.50 * (P/A,i%,40) + 3000*(P/F,i%,40) = 2811.729
When i = 3%, value of 67.50 * (P/A,i%,40) + 3000*(P/F,i%,40) = 2479.917
And by using interpolation
i = 2.5% + (2811.729-2775) / (2811.729-2479.917) *(3-2.5)
i = 2.5% + 0.05534%
i = 2.555%
Nominal yeild = 2.555% * 4 = 10.22%
Effective yeild = (1+0.02555)^4 - 1 = 0.10618 = 10.62%
The range of effective rate of return that the purchaser will receive would be between 10.2% - 11.2%
