Question

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $1,000 in March 2037, but investors would receive nothing until then. Investors paid DMF $500 for each of these securities; so they gave up $500 in March 2012, for the promise of a $1,000 payment 25 years later. Assuming that you purchased the bond for $500, what rate of return would you earn if you held the bond for 25 years until it matured with a value $1,000? Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of 1.4 percent until that date. How much would the bond be worth at that time? In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2037. What annual rate of return will you earn over the last 15 years?

Answer 1

Value of Bond at (2012) Zero period is $ 500 (at which available to public)

Maturity is 25 years (2037) on maturity bond will redeemed for $1000

after 10 year from purchase (2022) company will pay the interest @1.4% P.A

Since in the question Discounting factor not given, I assumed that Interest rate is also Discounted rate

Find the below screenshot , when bond redeemed at 2022, Value of Bond:

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Please find the below screenshot, for cal of rate of return of bond: