Reference no: EM13615521

Ethan Jones is an investment broker. Recently he contactedpotential investors and offered to sell them bonds that were payingan 8% annual rate of interest. He noted that the bonds were payinga much higher return than other investments and that similar bondswere selling at a real rate of 6% interest. The bonds had a 10-year maturity and paid interest semiannually. Several investorspurchased the bonds because of the high rate of interest but laterwere concerned to learn that the maturity value of $ 1,000 per bondwas considerably less than the $ 1,350 they had paid for eachbond.

Compare the price of the bonds sold by Ethan to bondsyielding a real rate of 6%. What was the approximate real rate ofreturn earned by the investors? Did they have a right to beconcerned about their investments? Do you see any ethical problemswith Ethan's sales pitch?