Question

in order to expand its sphere of influence, amazon offers a bond price of $300 for an 8% $3000 that measures in 15 years with a dividend payable quarterly. what nominal and effective interest rates per year, compounded quarterly, will amazon pay its investors?

Answer 1

Amazon's bond offers a nominal interest rate of 8% and an effective interest rate of approximately 8.24% per year, compounded quarterly. The nominal rate refers to the stated annual interest, and the effective rate takes into account the compounding of interest quarterly.

Step-by-step explanation:

To calculate the nominal interest rate and effective interest rate for Amazon's bond offering, we need to consider the details given in the question. The bond pays an 8% annual interest rate on a $3,000 face value, with interest paid quarterly. This means that each quarter, investors receive 2% of the face value ($3,000), which equates to $60 per quarter.

Since there are no deviations from the standard, the nominal annual rate in this case is simply the annual interest: 8%. To find the effective rate, which takes into account the quarterly compounding of interest, we use the formula: (1 + i)n - 1, where i is the interest rate per period and n is the number of periods. In this example, i is 0.02 (2% per quarter) and n is 4 (4 quarters in a year).

The effective annual rate (EAR) is calculated as follows:

(1 + 0.02)4 - 1 = 1.082432 - 1 = 0.0824 or 8.24%

Therefore, the bond offers a nominal interest rate of 8% and an effective interest rate of approximately 8.24%, compounded quarterly.