A 1000 face value 20-year 8% bond with semi-annual coupons is purchased for 1014. The redemption value is 1000. The coupons are reinvested at a nominal annual rate 6%, compounded semi-annually.

Determine the purchaser’s annual effective yield over the 20 year period

• 6.9%
• 7.0%
• 7.1%
• 7.2%
• 7.3%

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.

Solution: C

[math]1014(1+j)^{20}=1000+.04 * 1000 * s_{\overline{40} \mid .03}[/math] so

[[math]]j=\left(\frac{1000+40 s_{\overline{40} \mid .03}}{1014}\right)^{1 / 20}-1=.071243[[/math]]

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.