A $1,900 bond at a 11.65% interest rate is purchased at 80% of face value. What is the rate of annual yield to the investor? Assume the bond is purchased on the interest date.

Question

Quizplus · Accepted Answer

First, we need to calculate how much the bond was purchased for:

$1,900 * 0.8 = $1,520

Next, we need to calculate the amount of interest earned annually:

$1,520 * 0.1165 = $176.48

Finally, we can calculate the annual yield:

$176.48 / $1,520 = 0.116 (rounded to 3 decimal places) or 11.6%

However, since the bond was purchased on an interest date, the investor will receive the entire $176.48 interest payment for the year, even though they only paid $1,520 for the bond. This means the annual yield is slightly higher:

$176.48 / $1,520 = 0.116 (rounded to 3 decimal places) or 11.6% * 2 = 23.2%

But since we are looking for the annual yield rate as a percentage of the bond's purchase price, we need to divide by 2 again:

23.2% / 2 = 11.6%

Therefore, the answer is A) 14%.

A $1,900 Bond at a 11