In March 2012, Daniela Motor Financing (DMF), offered some securities for sale t

Question

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public.

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public.

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $300 in March 2037, but investors would receive nothing until then. Investors paid DMF $150 for each of these securities; so they gave up $150 in March 2012, for the promise of a $300 payment 25 years later Required: (a) Assuming that you purchased the bond for $150, what rate of return would you earn if you held the bond for 25 years until it matured with a value $300? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Rate of return (b) Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of .7 percent until that date. How much would the bond be worth at that time? Round your answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Bond value (c) In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2037. What annual rate of return will you earn over the last 15 years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Rate of return

Explanation / Answer

Answer:(a) To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of eother. We will use the FV formula, that is:

FV = PV(1 +r)t

Solving forr, we get:

r= (FV / PV)1/t– 1

=($300/$150)1/25-1

=2.81%

Answer:(b) Using the FV formula, we get:

FV = PV(1 +r)t

FV = $150(1 + .007)10

FV = $160.84

Answer:(c) Using the FV formula and solving for the interest rate, we get:

r= (FV / PV)1/t– 1

=($300/$160.84)1/25-1

=2.52%

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