Reference no: EM131456368
One hundred $1,000 bonds having a bond rate of 8% per year payable quarterly are purchased for $97,500, kept for 4 years, and sold for $95,000. Determine the effective annual return on the bond investment.
The general expression relating the terms associated with a bond is:
P = Vr(P/A i%,n) + F(P/F i%,n)
where :
P = purchase price of a bond
F= the sales price (or redemption value) of a bond
V = the par or face value of a bond
r = the bond rate (coupon rate) per interest period
i = the yield rate (return on investment or rate of return) per interest period
n = the # of interest (coupon) payments received by the bondholder
A = Vr = the interest or coupon payment received per interest period
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