Question

Joaquim Alvez purchases 32 bonds that mature in 2024 at 96.7.

They have a coupon rate of 8.625%.

Find the effective interest rate rounded to the nearest tenth.

Answer 1

The coupon rate given to us is 8.625%.

To find the effective annual interest rate, we will have to use the following formula:

`ER=(1+(r)/(n))^n -1`

Where ER is the Effective Rate

r is the coupon rate in per unit

n is the number of months in a year.

Thus, if we apply the formula, we will get the effective rate to be:

`ER=(1+(0.08625)/(12))^(12)-1\approx0.08974`

In percentage, the effective rate is ER=8.974% and to the nearest tenth it is 9.0%.

Answer 2

The effective interest rate will be:

((1+0.08625÷12)^(12)−1)×100

=8.974%