Question

Herber Company has issued 14% $1,000 par value bonds with quarterly compounding
and 12 years remaining to its maturity date. Bonds of similar risk are currently selling at
a rate of 14 percent .You are planning to buy 10 bonds with $10,000.Can you make it ?

Answer 1

We know that

Effective Rate of interest = ( 1+Nominal Rate/n)^n-1

Where n = Number of Compounding periods

Given the Interest rate is 14% Compounded Quarterly.

Effective Rate of interet = ( 1+0.14/4)^4-1

= (1.035)^4-1

= 1.14752-1

= 0.14752 ( or ) 14.752%

So if we get the interest Quartely then the Yield on suvh bond is 14.752%.

On the other hand similar bond is giving just 14% return.

Decision making:It is good to invest in 14% bond quartely Compounding.So it is good to invest in 14% rate bond compounding Quarterly.

If you are having any doubts,please post a comment.

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