The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500.If the price of the bond falls to $3,000, then the effective interest rate yield to a new buyer of the bond is:
A)14.4 percent.
B)16.6 percent.
C)11.0 percent.
D)9.0 percent.

Question

Quizplus · Accepted Answer

Since the bond has no expiration date, we need to calculate the effective interest rate yield based on the current price of the bond.

The annual interest payment is still $500, so we need to calculate what percentage that is of the new price of the bond:

$500 / $3,000 = 0.1667 or 16.67%

Therefore, the effective interest rate yield to a new buyer of the bond at the discounted price of $3,000 is 16.6%.

The Price of a Bond with No Expiration Date Is