Final answer:
The expected rate of return for Zenith Co.'s bonds, which are purchased for $700 and have a face value of $1,000 with 9% annual interest over 8 years, is 18.21%.
Step-by-step explanation:
The expected rate of return for a bond can be calculated by taking into account the annual interest payments and the capital gains (or losses) due to the difference between the purchase price and the face value of the bond.
In this instance, Zenith Co.'s bonds have a face value of $1,000 and pay 9% interest annually. If you purchase the bond for $700, over the 8-year period, you would receive annual interest payments totaling $720 (9% of $1,000 * 8 years = $720). At maturity, assuming you receive the face value of $1,000, your total return would be the interest received plus the capital gain, which is the face value minus the purchase price ($1,000 - $700 = $300). Therefore, your total return on the bond would be $720 + $300 = $1,020. The expected rate of return is calculated by dividing the total return by the purchase price and then dividing by the number of years to determine the annual rate:
Expected Rate of Return = ($1,020 / $700) / 8 years = 18.21%