Question

1) A person paid $950 for a five year, $1,000, 9% bond.

Required:

1. a) Determine how much cash the bondholder will receive each year as interest.

2. b) Determine the amount of cash the bondholder will receive for his return on investment (950 paid)

   and the return of his investment for the $1,000 bond. Be sure to show your work.

3. c) Determine if the effective (market) interest rate is less than, equal to, or greater than

   12%.

Answer 1

a)1000*9%=$90 Bond holder receive $90 every year. Bond issued on the basis of discount,but interest is caluculated on the face value of the bond.

b)5*90= $450. $450 is the return on investment.

c) market rate of interst is lessthan 12% . $90 is the return on investment, rate of return is 9.47%. that means this is lessthan 12%.