Answered

Westonci.ca offers quick and accurate answers to your questions. Join our community and get the insights you need today. Join our Q&A platform to connect with experts dedicated to providing precise answers to your questions in different areas. Our platform offers a seamless experience for finding reliable answers from a network of knowledgeable professionals.

you buy a bond with a $1,000 par value today for a price of $825. the bond has 5 years to maturity and makes annual coupon payments of $65 per year. you hold the bond to maturity, but you do not reinvest any of your coupons. what was your effective ear over the holding period?

Sagot :

The effective EAR over the holding period is 9.938% with TV as $1325 and PV as $825 with 5 years of annual compounding period.

What is EAR ?

The Effective Annual Interest Rate (EAR) is the interest rate that takes compounding over a given time period into consideration. Simply put, the effective annual interest rate is the rate of interest that an investor can earn (or pay) in a year after accounting for compounding.

EAR can be used to estimate the interest due on any debt, including loans, as well as the returns from investments like savings accounts and guaranteed investment certificates (GICs).

The annual equivalent rate (AER), effective rate, and effective interest rate are all terms used to refer to the effective annual interest rate. Compared to the APR, which is based on basic interest, this percentage rate is lower.

To solve the question :

Total value in 6 years :

(par value of bond + years to mature × (annual coupon payment))

= 1,000 + 5(65) = 1,325

Calculator entries for EAR are

PV = 825

TV = 1325

n = 5 years

[tex](PV)(1 + EAR)^{n}[/tex]= TV

[tex](825)(1+EAR)^{5}[/tex]= 1325

[tex](1+EAR)^{5}[/tex] = 1325/825

[tex](1+EAR)^{5}[/tex] = 1.606

EAR = [tex](1.606)^{1/5} - 1[/tex]

EAR = 1.09938 - 1

= 0.09938 × 100

= 9.938%

Hence, the effective EAR is 9.938%

To know more about, EAR, visit :

https://brainly.com/question/13024233

#SPJ4

Thanks for using our platform. We're always here to provide accurate and up-to-date answers to all your queries. Thanks for using our platform. We aim to provide accurate and up-to-date answers to all your queries. Come back soon. Find reliable answers at Westonci.ca. Visit us again for the latest updates and expert advice.