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
You might also like to view...
What are the rules of thumb when conducting a pressure test?
What will be an ideal response?
The temperature of superheated refrigerant is
A. at its boiling point. B. above its boiling point. C. below its boiling point. D. none of the above.
Zero and span adjustments may affect each other.
Answer the following statement true (T) or false (F)
Fear of which other political movement encouraged the formation of Christian socialist parties across much of Europe?
a. municipal socialism b. anarchism c. conservatism d. communism