A $20,000 bond is redeemable at 105 in 15 years and pays bond interest at j₂ = 12%.The purchase price is $22,200 based on a yield rate of j₂ = x%.Determine × using the method of averages.

Question

Quizplus · Accepted Answer

Using the method of averages:

Average annual interest payment = (0.12 * $20,000) = $2,400

Average annual yield rate = (total return / purchase price) = (105/100 * $20,000 / $22,200) = 0.95

Now we can use the formula for the present value of an annuity to solve for x:

$20,000 = ($2,400 / x) * (1 - 1/(1+x)^15) + $20,000 / (1+x)^15

Using trial and error or a financial calculator, we find that x ≈ 10.74%.

Therefore, the best choice is C.

A $20,000 Bond Is Redeemable at 105 in 15 Years