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In: Accounting

(1 point) A $3500 bond paying interest at j1j1 = 10% matures on June 1, 2030....

(1 point) A $3500 bond paying interest at j1j1 = 10% matures on June 1, 2030. On July 22, 2004, it was purchased for $3551 plus bond interest. On April 3, 2009, it was sold for $3443 plus bond interest. Estimate the yield j1j1 by the method of averages.

Solutions

Expert Solution

To calculate the yield method of averages we have figures mentioned below, to calculate the average return yield we should have the interest gain for the bond holding years and the value of the bond sold in specific year.

Bond paying interest = 10%

Rate of bond purchased = $ 3551

Rate of bond sold $ 3443

Below table is the calculation for simple bond yield of j1 of the years bond holded.

A B C D E
Total period Year Bond Value Interest rate No. of Days/Months/Year for the bond paid Interest earned for the year Calcualtion for the "E" Column
22-Jul-2004 to 31-Dec-2004 3500 10% 162 Days 155.342 =3500*10%*162/365
2005 3500 10% 1 Year 350 =3500*10%
2006 3500 10% 1 Year 350 =3500*10%
2007 3500 10% 1 Year 350 =3500*10%
2008 3500 10% 1 Year 350 =3500*10%
1-Jan-2009 to 3-Apr-2009 3500 10% 92 Days 88.219 =3500*10%*92/365
Total 1643.561

So here toal interest gain of j1 is $1643.561

So our net gain being puchased price minus sales price plus interest received i.e. mentioned below;

= $3551 - $3443 = -$108 (being a loss we are marking it has minus)

= -$108 + $1643.561

= $1535 for a approximate period of 5 years, which is $307 per year.


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