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In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $400 in March 2052, but investors would receive nothing until then. Investors paid DMF $200 for each of these securities; so they gave up $200 in March 2012, for the promise of a $400 payment 40 years later.
Required:
(a) Assuming that you purchased the bond for $200, what rate of return would you earn if you held the bond for 40 years until it matured with a value $400?
Rate of return: %
(b) Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of .9 percent until that date. How much would the bond be worth at that time?
Bond value: $
(c) In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2052. What annual rate of return will you earn over the last 30 years?
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