2) Mary buys a 10 year bond with $10, 000 face value, semiannual nominal bond rate...

2) Mary buys a 10 year bond with $10, 000 face value, semiannual nominal bond rate 3%, and semiannual nominal yield rate 4%. She wants to reinvest the semiannual coupons (immediately after each coupon is received) into a fund so that her non time valued net profit at maturity (A.V. of coupons + face value at maturity − bond price) is $5, 000. Find the interest rate (as a semiannual nominal rate) that the account must earn for this to occur.

Expert Solution

Price of the bond= $ 9,182.43 Calculated using PV function of Excel as follows:

Face value- price= $10,000-$9,182.43 = $817.57

In order to get $5,000 on maturity as net profit, maturity value of interest payments required

= $5,000 - $817.57 = $ 4,182.43

Semi annual interest received and re-invested= $1,000*3%/2 = $150

Semi annual Interest rate required= 3.362285% calculated using RATE function of Excel as follows:

jeff jeffy answered 1 year ago

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