I don't get the difference between the effective annual interest rate and nominal rate, how does it make the answer for this question any different??
the question is: you are considering a 10 year 1,000 par value bond. its coupon rate is 9 percent, and interest is paid semi-annually. If you require an "effective" annual interest rate (not a nominal rate) of 8.16 percent, then how much should you be willing to pay for the bond?
I used a financial calculator to do the following:
since its semi-annual i calculated payment as (PMT): .09/2 x 1000 = 45
Number of years (N) = 10 x 2 = 20
Interest (I/Y) = 8.16/2 = 4.08
Future Value (FV) = 1000
and i computed PV which equals = 1,056.68
PV is max price investor is willing to pay for the bond, did i get it right, and how is effective vs. nominal interest rate make my answer any different? rather, what does it even mean?
2007-11-23
10:57:51
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3 answers
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asked by
hauntition
2
in
Investing