8.
Let, semi annual rate of return = R
Time = 10 semiannual periods
semiannual coupon payment = (20%/2)*50000 = $5000
So,
58000 = 5000*(1-1/(1+R)^10)/R + 50000/(1+R)^10
At R = 7%
PW of cash inflows = $60535.37
At R = 8%
PW of cash inflows = $56710.08
As per the interpolation,
R = 7% + ((60535.37 - 58000)/(60535.37 - 56710.08))*(8% - 7%)
R = 7.65%
So,
Annual rate of return ( compounding semiannually) = 2*7.65%
Annual rate of return ( compounding semiannually) = 15.3%
Effective annual rate of return = (1+7.65%)^2 - 1
Effective annual rate of return = 15.89%
8. During recessionary periods, bonds that were issued many years ago have a higher coupon rate...
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