An investor purchased a $60,000 bond with coupons payable at j₂ = 6% on March 1,2010 (first coupon was due on September 1,2010)for $55,200.He then sold this bond $58,200 on March 1,2015.Using the method of averages,what is the investor's yield rate,j₂?

Question

Quizplus · Accepted Answer

To calculate the yield rate using the method of averages, we need to find the average coupon rate and the average price.

Total interest paid = 6% x $60,000 x 5 years = $18,000
Total income = Interest + (Sale price - Purchase price) = $18,000 + ($58,200 - $55,200) = $21,000

Average price = (Purchase price + Sale price) / 2 = ($55,200 + $58,200) / 2 = $56,700

Therefore, the yield rate = (Total income / Average price) x 100% = ($21,000 / $56,700) x 100% = 37.06%

However, we need to divide this by the number of years (5) to obtain the annual yield rate.

Annual yield rate = 37.06% / 5 = 7.41%

Therefore, the best answer choice is C.

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