Question

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $300 in March 2037, but investors would receive nothing until then. Investors paid DMF $150 for each of these securities; so they gave up $150 in March 2012, for the promise of a $300 payment 25 years later. a. Assuming that you purchased the bond for $150, what rate of return would you earn if you held the bond for 25 years until it matured with a value $300?

Answer 1

annual rate of return oon the bond = 2.81%

Step-by-step explanation:

we need to calcualte the rate for which a present value of 150 becomes 300 in the future.

`Principal \: (1+ r)^(time) = Amount`

Principal 150.00

time 25.00

Amount 300.00

rate ??

`150 \: (1+ r)^(25) = 300`

`(1+ r)^(25) = 300/150`

`r = \sqrt[25]{300/150} - 1`

r = 0.028113827 = 2.81%