Question

A ten-year bond with a face value of $5,000 pays a dividend of $250 every six months.
Calculate the bond interest rate. If the bond is purchased for $3,994.25 at the end of
year one, what is the effective annual interest rate? What is the nominal annual interest
rate?

Answer 1

Annual bond interest rate =  (Dividend Payments*2)/Face Value*100

= ($250*2)/$5000*100

= 10%

Period	Amount	Interest rate @ 10% PVF	Discounted Values
6	$     250.00	0.9524	$ 238.10
12	$     250.00	0.9070	$ 226.76
18	$     250.00	0.8638	$ 215.96
24	$     250.00	0.8227	$ 205.68
30	$     250.00	0.7835	$ 195.88
36	$     250.00	0.7462	$ 186.55
42	$     250.00	0.7107	$ 177.67
48	$     250.00	0.6768	$ 169.21
54	$     250.00	0.6446	$ 161.15
60	$     250.00	0.6139	$ 153.48
66	$     250.00	0.5847	$ 146.17
72	$     250.00	0.5568	$ 139.21
78	$     250.00	0.5303	$ 132.58
84	$     250.00	0.5051	$ 126.27
90	$     250.00	0.4810	$ 120.25
96	$     250.00	0.4581	$ 114.53
102	$     250.00	0.4363	$ 109.07
108	$     250.00	0.4155	$ 103.88
114	$     250.00	0.3957	$ 98.93
120	$ 5,250.00	0.3769	$ 1,978.67
			$ 5,000.00

If the bond is purchased at $3994.25 after one year

convert this price into present value = $3994.25