Question

An investor who purchased a $10,000 mortgage bond today paid only $6,000 for it. The bond coupon rate is 8% per year, payable quarterly, and the maturity date is 18 years from the year of issuance. Because the bond is in default, it will pay no dividend for the next 4 years. If the bond dividend is in fact paid for the following 5 years (after the 4 years) and the investor then sells the bond for $7000, what rate of return will be realized per quarter.

Answer 1

Interest = Bond Purchase Price * Coupon Rate / No. Of Quarter

Bond Purchase Price is $10,000

Coupon Rate @ 8%

No of Quarters in a year = 4

Interest = 10,000 * 8%/4

therefore the interest is $200 per hour

CALCULATION OF RATE OF RETURN PER QUARTER

I n order to find it, the present value of it shalle be equivalent to zero (0)

PW = Amount Paid + Interest (P/A, I, N) (P/F, I, N) + SELLING PRICE (P/F, I N)

0 = -6000 + 200(P/A, I, 20) (P/F, I,16)+ 7000(P/F, I , 36)

6000 = 200(P/A, I, 20) (P/F, I,16)+ 7000(P/F, I , 36)

SOLVE FOR I BY TRAIL AND ERROR

I = 1.25% PER QUARTER