2. Calculate the Yield-to-Maturity (Annual Percentage Rate-APR) on a proposal to

Question

2. Calculate the Yield-to-Maturity (Annual Percentage Rate-APR) on a proposal to purchase a bond for $1,020 today, which promises to provide interest payments of $60 every quarter (3-month period) for the next four years with the first interest payment to be received three months from today, plus a payment of S1,000 at the time of the last $60 interest payment is made. [You must use the method we introduced in class for rate-of-return problems.] P = $1,020 + $60 (P/A,r/4.16) + $1,000 (P/Fz/4.16) = 0 P(10%)--332.95 P(596)=+88.38 r/4-.05 + [88.38-0]/(88.38- _ 332.95] * (.10- .05) = 0.0605 APR = (1 + 0.0605)4-1 = 0.2648 26.5%

Explanation / Answer

Interest payments are $60 every quarter for next four years, that is 12 quarter payments but the payments starts after 2 quarters. First payments is for 3rd quarter, that means that 2 quarters are skipped which means that payments quarters are then reduced to 12-2 = 10

That is why we calculated P(10%)

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