An engineer bought a $1000 bond of an American airline for $875 just after an interest payment had been made. The bond paid a 6% coupon interest rate semiannually. What nominal rate of return did the engineer receive from the bond if he held it 13.5 years until its maturity

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Business

Kadyn Hodge

3 December, 14:58

An engineer bought a $1000 bond of an American airline for $875 just after an interest payment had been made. The bond paid a 6% coupon interest rate semiannually. What nominal rate of return did the engineer receive from the bond if he held it 13.5 years until its maturity

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Bridget · Answer 1

Number of coupon payments = 13.5*2 = 27

Coupon = 6%*1000/2 = 30

Let rate be r

Present value of all future payments = $87

875 = 30 * (1-1 / (1+r) ^27) / r + 1000 / (1+r) ^27

R = 3.74%

Nominal rate = 3.74%*2 = 7.49%