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

Question

Garrett Tanner

Business

26 July, 14:29

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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Cash · 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%