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What is the effective annual rate of interest

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Question - Belmont, CA (home of your alma mater!) is issuing a 10-year municipal term bond with a total maturity value of $1,000,000 to raise money for building an extra lane on Ralston Avenue (to hopefully alleviate the horrible traffic!). The bonds will pay interest semi-annually at an annual coupon (i.e. stated) rate of 8%. The annual market rate on bonds of similar risk is currently 6%.

a. Without calculating, will Belmont raise more, less or the same amount as the $1,000,000 par value of the bonds? Explain.

b. How much interest does Belmont pay bondholders every six months?

c. Fill in the blank:

Belmont will pay bondholders $____________ of principal when the bond matures in 10 years.

d. How much money does Belmont receive when it issues the bonds?

e. Suppose that market interest rates for similar-risk municipal bonds rises to 10% at the time of issue.

(1) The bond will sell at a: DISCOUNT PREMIUM (circle one)

(2) What is the amount of the discount or premium?

(3) What is the effective annual interest rate paid by Belmont given the rise in the market interest rate?

(4) What is the effective annual rate of interest earned by bondholders given the rise in the market interest rate?

Reference no: EM132743386

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