A savvy investor paid $6000 for a 20-year $10,000 mortgage bond that had a bond interest rate of 8% per year, payable quarterly. Three years after he purchased the bond, market interest rates went down, so the bond increased in value. If the investor sold the bond for $11,500 three years after he bought it, what rate of return did the investor make (a) per quarter, and (b) per year (nominal)?
What will be an ideal response?
I = 10,000(0.08)/4 = $200 per quarter
(a) 0 = -6000 + 200(P/A,i*,12) + 11,500(P/F,i*,12)
Solve for i* by trial and error or spreadsheet
i* = 8.13% per quarter (RATE function)
(b) Nominal i*/year = 8.13(4) = 32.5% per year
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