Janice V. bought a 5% $1000 twenty-year bond for $925. She received a semiannual dividend for 8 years, then sold it immediately after the 16th dividend for $800. What rate of return did she make (a) per semiannual period, and (b) per year (nominal)?
What will be an ideal response?
(a) Dividend = 1000(0.05)/2 = $25 per 6 months
0 = -925 + 25(P/A,i*,16) + 800(P/F,i*,16)
Solve by trial and error or IRR function
i* = 1.98% per 6 months (spreadsheet)
(b) Nominal rate = 1.98*2 = 3.96% per year
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