Question

Eagle Industries' bonds have a 10-year maturity and a 8.45% coupon paid semiannually. They sell at their $1,000 par value, and are not callable. What is the effective annual rate (EFF%) for these bonds? Recall that EFF% = (1 + (Nominal Rate /n)]" - 1 Your answer should be between 7.20 and 9.12, rounded to 2 decimal places, with no special characters.

Answer 1

The effective annual rate (EFF%) for the Eagle Industries' bond with a 10-year maturity and 8.45% coupon rate paid semiannually is 8.62%, when rounded to two decimal places.

Step-by-step explanation:

The student has asked to calculate the effective annual rate (EFF%) for an Eagle Industries' bond that has a 10-year maturity and a 8.45% coupon rate paid semiannually. These bonds are sold at their $1,000 par value and are not callable. To find the effective annual rate, we use the formula given: EFF% = [(1 + (Nominal Rate / n))^n] - 1, where the Nominal Rate is the annual coupon rate and 'n' is the number of compounding periods per year.

In this case, the Nominal Rate is 8.45% (or 0.0845 in decimal form) and 'n' is 2 because the coupon is paid semiannually. Substituting in the values, we get: EFF% = [(1 + (0.0845 / 2))^2] - 1. Calculating this gives us the effective annual rate.

After calculating, we get: EFF% = [(1 + 0.04225)^2] - 1 = [1 + 0.04225]^2 - 1 = [1.04225]^2 - 1 = 1.0862140625 - 1 = 0.0862140625 or 8.62% when converted to a percentage and rounded to two decimal places.