Question

A savvy investor paid $5,000 for a 20-year $10,000 mortgage bond that had a bond interest rate of 10% per year, payable quarterly. Three years after he purchased the bond, market interest rates went down, so the bond increased in value. If the investor sold the bond for $13,000 three years after he bought it, what rate of return did the investor make per quarter and per year (nominal)? The rate of return per quarter is D % The rate of return per year is

Answer 1

Calculating APR on Deposit

Quarterly Payment = 0.10(10,000)/4 = $250

Using TVM Calculation

I = [PV = -10,000, FV = 13,000, PMT = 250, N = 12]

I = 0.1778

Rate per Quarter = 0.1778/4 = 4.45%

Rate per Year = 17.78%

EAR = (1 + 0.0445)4 - 1 = 19.00%