An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

Question

Quizplus · Accepted Answer

To solve for the annual E(r), we can use the following formula:

Bond Price = (Coupon Payment / E(r)) x [1 - 1 / (1 + E(r))^n] + Face Value / (1 + E(r))^n

where:
Coupon Payment = 7% x $1,000 face value = $70
n = 8 years
Face Value = $1,000

Plugging in the given values, we get:

$1,075 = ($70 / E(r)) x [1 - 1 / (1 + E(r))^8] + $1,000 / (1 + E(r))^8

Using trial and error or a financial calculator, we can solve for E(r) such that both sides of the equation are equal. The closest answer choice is B) 5.80 percent, which gives a bond price of $1,075.12. Therefore, B) is the best choice.

An Eight-Year Annual Payment 7 Percent Coupon Treasury Bond Has