Question

year. In or a) $737 b) $742 $746 s750 c) $847 0375 . Anna buys a corporat e bond from a brokerage firm for $750. The face value of the bond is $1,000, and it pays $40 in coupons each year. If Anna keeps the bond until it matures in 10 years, the rate of return Anna will earn a) 7.7% b) 59% c) 63% d) 4.2% e) 7.4% f) 5.3% h) 6.3% i)8.1% j) 8,5% k) 10.5% 12.3% m) 4.0% n) 7.2% 6. Assume Luke invested $450,000 and it retums S7,875 every quarter, forever. The effective gnnual interest rate closest to... Note: the first cash flow occurs one quarter after the investment. -a) 134%- 2.31% -c)0,58%- .322, 19% 07.49% g)8.11% h)1.75% i) 2.44%
#5

Answer 1

5.

Correct Answer:

A

Working note:

Let, rate of return = R

Present price of the bond = 750 = 40*(1-1/(1+R)^10)/R + 1000/(1+R)^10

At R = 8%

Present value of cash inflows = $731.6

At R = 7%

Present value of cash inflows = $789.3

As per the method of interpolation,

R = 7% + ((789.3-750)/(789.3-731.6))*(8%-7%)

R = 7.68% or 7.7%