1. ( bone rate, desired rate of retune and effective interest rate) A- given tha
ID: 2647480 • Letter: 1
Question
1. ( bone rate, desired rate of retune and effective interest rate)A- given thatcthe MARR = i = 6% per year what is th effective interest rate if the 6% per year is compounded quarterly
B- a bond with a PAR value of $20,000 is purchas d for $16,000 ( the issuing entity is comsidered a credit risk.) it is purchases immediately after it os issued. The bond rate is 12% per year payable wuarterly. The bond will be held for 6 years and sold immediately after receiving the last payment. If your desired rate of retune is 8% per year compounded quartely what will be the minimum selling pric of the bond? 1. ( bone rate, desired rate of retune and effective interest rate)
A- given thatcthe MARR = i = 6% per year what is th effective interest rate if the 6% per year is compounded quarterly
B- a bond with a PAR value of $20,000 is purchas d for $16,000 ( the issuing entity is comsidered a credit risk.) it is purchases immediately after it os issued. The bond rate is 12% per year payable wuarterly. The bond will be held for 6 years and sold immediately after receiving the last payment. If your desired rate of retune is 8% per year compounded quartely what will be the minimum selling pric of the bond?
A- given thatcthe MARR = i = 6% per year what is th effective interest rate if the 6% per year is compounded quarterly
B- a bond with a PAR value of $20,000 is purchas d for $16,000 ( the issuing entity is comsidered a credit risk.) it is purchases immediately after it os issued. The bond rate is 12% per year payable wuarterly. The bond will be held for 6 years and sold immediately after receiving the last payment. If your desired rate of retune is 8% per year compounded quartely what will be the minimum selling pric of the bond?
Explanation / Answer
A: Formula to calculate effective interest Rate:
r = [ 1 + (i/n) ] n - 1
r = Effective Interest Rate
i = Nominal Interest Rate, n = Number of Compounding Per Year
i = 6%, n = 4
r = [ 1 + (0.06 / 4) ] 4 - 1
r = 6.136%
B - Calculation of Effective Interest rate on Bond:
r = [1 + (0.12 / 4)4 - 1]
r = 12.551%
Annual Interest according to effective Rate = 20,000 x 12.551% = $2,510.20
Total Interest for 6 Years = 2,510.20 x 6 = $15,061.20
Calculation of Effective rate of Desired Return:
r = [1+ (0.08 / 4)4 - 1]
r = 8.243%
Required Return according to Effective Interest Rate = 16,000 x 8.243% = $1,318.90
Total Required return for 6 Years = $1,318.90 x 6 = $7,913.40
Difference between Bond's return and Desired Rate = 15,061.20 - 7,913.40 = $7,147.80
So, extra return received in 6 Years = $7,147.80
So, the minimum selling price should be: 16,000 - 7,147.80 = $8,852.20
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