You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

Question

Quizplus · Accepted Answer

Total value in 6 years = 1,000 + 6(75) = 1,450 Calculator entries for EAR are N = 6, PV = −875, PMT = 0, FV = 1,450, CPT I/Y → 8.78, or (875)(1 + EAR)⁶ = 1,000 + (75)(6); EAR = 8.78%

You Buy a Bond with a $1,000 Par Value Today