Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor,
ID: 2490409 • Letter: R
Question
Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, RBMCC promised to repay the owner of one of these securities $100,000 on March 28, 2038, but investors would receive nothing until then. Investors paid RBMCC $23,599 for each of these securities; so they gave up $23,599 on March 28, 2008, for the promise of a $100,000 payment 30 years later.
a. Based on the $23,599 price, what rate was RBMCC paying to borrow money? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Rate of return %?
b. Suppose that, on March 28, 2019, this security’s price is $41,880. If an investor had purchased it for $23,599 at the offering and sold it on this day, what annual rate of return would she have earned? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Annual rate of return %?
c. If an investor had purchased the security at market on March 28, 2019, and held it until it matured, what annual rate of return would she have earned? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Annual rate of return %?
Explanation / Answer
a)As the investors receive nothing until the end of 30 years, we calculate using the formula to find future value of a single sum at a specified rate of interest for a certain no.of yrs. Here, single sum or principal = 23599; Final amount= 100000 No.of yrs.= 30' and r= rate of interest to be found out 100000=23599(1+r)^30 r= 0.04931 Rate of return=4.93% b) For price on Mar 28,2019, ie. At the end of 11 years, 41880=23599(1+r)^11 0.05353 Rate of return=5.35% c) Buying at 41880 and holding till maturity (for 19 yrs. ) 100000=41880(1+r)^19 r=0.04687 Rate of return=4.69%
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