Question

Use the following information to answer the next questions (1-3).

QUESTION 1

1. Steve purchased 7% XYZ bonds four years ago for $915. These bonds mature in eight years and currently sell for $845. Steve believes he can sell the bonds in three years for $875. Find his realized rate of return if he chooses to sell the bonds today.

QUESTION 2

1. Find his expected rate of return if he chooses to sell the bonds three years from today. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format (EX: .XXXX).

QUESTION 3

1. Assuming that Steve's required rate of return is 6%, should he sell the bonds today or keep them for an additional three years? (Assume that his decision to sell the bonds or keep them has no impact on other possible investment opportunities.)

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Mike invested in a 10% bond six years ago for $1100. Find his realized rate of return if he sells the bond today for $1025.

Answer 1

QUESTION 1)

Hence, realized rate of return is 5.90%

QUESTION 2)

Hence, expected rate of return is 7.15%

QUESTION 3)

He will keep for additional three years.