Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor,
ID: 2649528 • 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, 2037, but investors would receive nothing until then. Investors paid RBMCC $24,499 for each of these securities; so they gave up $24,499 on March 28, 2008, for the promise of a $100,000 payment 29 years later.
Based on the $24,499 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))
Suppose that, on March 28, 2020, this security
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, 2037, but investors would receive nothing until then. Investors paid RBMCC $24,499 for each of these securities; so they gave up $24,499 on March 28, 2008, for the promise of a $100,000 payment 29 years later.
Explanation / Answer
a. Based on the $24,499 price, what rate was RBMCC paying to borrow money?
Solution-
FV= $100,000
PV= $24,499
N=29
FV=PV (1+r)t
Solving for r, we get:
r = (FV/PV)1/t-1
r = ($100,000 / $24,499)1/29 -1
r = 0.04969 or 4.96%
Rate of return = 4.96%
b. Suppose that, on March 28, 2020, this security
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