Question

A 30-year, $1,000 strip bond was traded for $167, four years after it was issued. What was the semi-annually compounded nominal rate at that time? Calculate percentages accurate to the nearest 0.01%.

Answer 1

Answer:

The semi-annually compounded nominal rate at that time is 7%

Step-by-step explanation:

In order to calculate the semi-annually compounded nominal rate at that time we would have use the following formula:

PV= FV/(1+r)^n

According to the given data we have the following:

PV=$167

FV=$1,000

n=30-year, and strip bond was traded four years after it was issued, hence, n=(30-4)*2 =52

Therefore, 167= $1,000/( 1+r)^52

167/$1,000 =1/(1+r)^52

0.167 =1/(1+r)^52

r =3.50%

Therefore, The semi-annually compounded nominal rate at that time=3.50%*2

The semi-annually compounded nominal rate at that time=7%

The semi-annually compounded nominal rate at that time is 7%