Mr.A purchases a $10,000 bond with semi-annual coupons at j₂ = 8%,maturing at par in 5 years for $10,415.83.Mr.A immediately sells the bond coupons and the remaining strip bond.He sells the coupons for $3500.83.After he has sold both pieces,he has made a total profit of $525.94.At what yield rate,j₂,did he sell the strip bond at?

Question

Quizplus · Accepted Answer

The correct answer is A because the yield rate at which Mr. A sold the strip bond is 6.00%. This can be calculated using the formula:Strip bond price = Present value of future cash flows / (1 + j/2)^nwhere:j = yield raten = number of semi-annual periodsIn this case, the present value of future cash flows is $10,000 (the face value of the bond), and n is 10 (5 years * 2 semi-annual periods per year). Substituting these values into the formula, we get:Strip bond price = $10,000 / (1 + j/2)^10We know that Mr. A sold the strip bond for $10,415.83, so we can set the strip bond price equal to this value and solve for j:$10,415.83 = $10,000 / (1 + j/2)^10(1 + j/2)^10 = $10,000 / $10,415.83(1 + j/2)^10 = 0.96091 + j/2 = 0.9804j/2 = -0.0196j = -0.0392Converting this to an annual yield rate, we get:j = 2 * (-0.0392) = -0.0784j = 7.84%Therefore, the yield rate at which Mr. A sold the strip bond is 7.84%.

MrA Purchases a $10,000 Bond with Semi-Annual Coupons at J2

MrA Purchases a $10,000 Bond with Semi-Annual Coupons at J₂