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Use the method of averages to find the approximate yield rate for the bond shown in the table below
Use the method of averages to find the approximate yield rate for the bond shown in the table below. The bond is to be redeemed at par.
Face value = $7,000
Bond rate, payable semiannually = 10%,
Time before maturity = 5 years
Market quotation = 103.375
The yield rate?
Expert Solution
Computation of the approximate yield rate:-
Yield rate = (Coupon payment+((Face value-Present value)/n))/((Face value + Present value)/2)
Here,
Coupon payment = $7,000*10%/2 = $350
n = 5*2 = 10 periods
Present value = $7,000*103.375% = $7,236.25
Yield rate = ($350+(($7,000-$7,236.25)/10))/(($7,000+$7,236.25)/2)
= ($350-$23.625000)/$7,118.125000
= $326.375000/ $7,118.125000
= 4.59%
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