During recessionary periods, bonds that were issued many years ago have a higher coupon rate than currently issued bonds. Therefore, they may sell at a premium, a price higher than their face value, because of currently low coupon rates. A $50,000 bond that was issued 15 years ago is for sale for $60,000. What rate of return per year will a purchaser make if the bond coupon rate is 14% per year, payable annually, and the bond is due 5 years from now? Write the ROR equation and use a single-cell spreadsheet function to display the correct answer directly.
What will be an ideal response?
0 = -60,000 + 50,000(0.14)(P/A,i*,5) + 50,000(P/F,i*,5)
Solve by trial and error or IRR function
i* = 8.9% per year (spreadsheet)
Function: = RATE(5,7000,-60000,50000) displays i* = 8.9% per year
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