Question

In March 2018, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $5,000 in March 2043, but investors would receive nothing until then. Investors paid DMF $880 for each of these securities; so they gave up $880 in March 2018, for the promise of a $5,000 payment 25 years later. a. Assuming you purchased the bond for $880, what rate of return would you earn if you held the bond for 25 years until it matured with a value $5,000

Answer 1

Answer:

The rate of return is 7.20%

Explanation:

a)  Assuming you purchased the bond for $880, in order to calculate the rate of return you earn if you held the bond for 25 years until it matured with a value $5,000 we would have to calculate the following formula:

Rate of Return = [FV/PV]1/n - 1

Rate of Return= [$5,000 / $880]1/25 - 1 = [5.6818]0.04 - 1 = 1.0720 - 1 = 0.0720, or 7.20%

Rate of Return= [5.6818]0.04 - 1

Rate of Return= 1.0720 - 1

Rate of Return=0.0720, or 7.20%

The rate of return is 7.20%