A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be:

a. equal to 3.5 percent

b. greater than 3.5 percent but less than 4 percent

c. equal to 7 percent

d. greater than 7 percent but less than 8 percent

e. equal to 14 percent

The correct answer is A

Explanation:

Computing the effective interest rate per payment period for the payment schedule which is semi - annual interest:

The formula to compute the effective interest rate which is provided by the bonds is as:

Effective rate (semi - annually) = Nominal rate (r) / Compounded quarterly (m)

where

r is 7%

m is 2 (every 6 months)

Putting the values above:

= 7% / 2

= 3.5%

Therefore, 3.5% is the effective annual rate offered by these bonds.