to be continued in the bac k Problem :35 ABC Corporation\'s recently issued bond

Question

to be continued in the bac k Problem :35 ABC Corporation's recently issued bonds paying interest semiannually and maturing in 10 years. The face value of each bond is $1000, and 6.8% is the nominal interest rate. (a) What is the effective interest rate an investor receives? (b) If a 0.75% fee is deducted by the brokerage firm from the initial S1000, what is the effective annual interest rate paid by ABC Corporation? Analysis a) Effective rate of veturn Can be des cvibcdas av atr af vetuencn bod ‘1rufmm iv c Soler ansue 6.8% X2= 13.6 % locolloc, pbmts (.goc. % 35-r(a ormula for calcula tro 13.60 2 ECRective 14,06 24 = Effect ( By, cy) asing send Sheet. Page 1 of

Explanation / Answer

2) Effective interest rate = (1 + .068/2)^2 - 1

                                   = (1+ .034 )^2-1

                                   = (1.034)^2 -   1

                                   = 1.0692- 1

                                  = .0692 or 6.92%

If brokerage is paid ,effective rate = 6.92 +.75 = 7.67%

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