Face value, M = $ 7,000
Coupon rate = 4% per year, semi annually
Coupon, c = 4% of $7000 = $ 280
Semi annually he received, C = $ 140
The present value of cash flow can be written as follows
Price = C(PVIFA,i%,10) + M(PVIF,i%,10)
Mathematically it can be written as follows
Now we can calculate the RoR through trial and error method
Let us assume i= 10%
On solving we will get
P = $ 3,558.80
Since, price is $5450 Thus decrease the rate Let us assume i= 5%
P = 140*7.722 + 7000*0.6139
P = $ 5,378.38
Still price is greater than the actual price again decrease i. Let us assume i=4.5%
P = 140*7.913 + 7000*0.6439
P= $ 5,615.12
Now we can see the price lies in between 4.5% to 5%. We can determine it using linear interpolation technique as follows
RoR = 4.85%
Here we have calculated RoR for semi annual basis. Thus, the actual RoR for 5 years will be twice of it
Thus, RoR= 9.70%
Answer is e. $ 140, 9.82%
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