A $10,000 mortgage bond with a bond interest rate of 12% per year, payable quarterly, was purchased for $8,800. The bond was kept until it was due, a total of 5 years. What is correct equation (PWr-PWd=0) to calculate the rate of return "i*" made by the purchaser of the bond?

Question

Business

Rowan Ramsey

3 March, 22:46

A $10,000 mortgage bond with a bond interest rate of 12% per year, payable quarterly, was purchased for $8,800. The bond was kept until it was due, a total of 5 years. What is correct equation (PWr-PWd=0) to calculate the rate of return "i*" made by the purchaser of the bond?

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Answers (1)

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Elsa Klein · Answer 1

-8,800 + 300 (P/A, i*,20) + 10,000 (P/F, i*,20) = 0

Explanation:

Given that

Value of the mortgage bond = $10,000

Interest rate = 12% per year

Purchase value = $8,800

Time period = 5 years

Now the correct equation is

-$8,800 + 300 (P/A, i *,20) + 10,000 (P/F, i*,20) = 0

The $8,800 represents the purchase value

The 20 represents the 5 years * 4 quarters

Interest = $10,000 * 12% : 4 = $300