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vichka [17]
3 years ago
5

On January 1, Year 1, Greenfield, Inc. issues $100,000 of 9% bonds maturing in 10 years when the market rate of interest is 8%.

Interest is paid semiannually on June 30 and December 31. When using a financial calculator to compute the issue price of the bonds, the applicable periodic interest rate ("I") is:
Business
1 answer:
ELEN [110]3 years ago
8 0

Answer:

When using a financial calculator to compute the issue price of the bonds, the applicable periodic interest rate ("I") is 3.923%

Explanation:

Hi, first, the discount interest rate that you have to choose is 8%, because 9% is the coupon rate (which in our case would be 9%/2=4.5% and this is used only to find the amount to be paid semi-annually).

Now we know we have to choose 8%, but this is an effective rate (I know this is an effective rate because no units were mentioned), and by definition it is a periodic rate, but it is not the rate that we need since the payments are going to be made in a semi-annual way, therefore we need to use the following equation.

r(semi-annual)=[1+r(annual)]^{\frac{1}{2} } -1

So, everything should look like this.

r(semi-annual)=[1+0.08]^{\frac{1}{2} } -1=0.03923

Therefore, the periodic interest that yuo have to use to calculate the price of the bond is 3.923%

Best of luck.

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