Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor,

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, 2039, but investors would receive nothing until then. Investors paid RBMCC $23,699 for each of these securities; so they gave up $23,699 on March 28, 2008, for the promise of a $100,000 payment 31 years later.

Based on the $23,699 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))

(4.75)

Suppose that, on March 28, 2018, this security

Based on the $23,699 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))

Explanation / Answer

a. Time period = 2039-2008 = 31 years

Rate = (100,000/23,699)^(1/31) - 1 =  0.04753=4.753%

b. Time period = 2018-2008 = 10 years

Rate = (41,980/23,699)^(1/10) - 1 = 5.88%

c. Time period = 2039-2018 = 21 years

Rate = (100,000/41,980)^(1/21) - 1 = 4.22%

Hope this helped !

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