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, means did AMAZON make profit?

Answer 1

To calculate the nominal and effective interest rates per year, compounded quarterly, that Amazon will pay its investors, we can use the formula for present value of a bond.

Step-by-step explanation:

To calculate the nominal and effective interest rates per year, compounded quarterly, that Amazon will pay its investors, we can use the formula for present value of a bond. The formula is: PV = C[(1 - (1 + r/n)^(-nt))/(r/n)]. Where PV is the present value of the bond, C is the coupon payment, r is the nominal interest rate, n is the number of compounding periods per year, and t is the number of years. In this case, the coupon payment is $300, the nominal interest rate is 8%, the number of compounding periods per year is 4 (quarterly), and the number of years is 15. By plugging in these values, we can solve for the PV, which will give us the bond price. If the bond price is less than the face value, Amazon made a profit.

Once we have the bond price, we can calculate the nominal and effective interest rates per year. The nominal interest rate per year is simply the coupon payment divided by the bond price, multiplied by the number of compounding periods per year. The effective interest rate per year is calculated using the formula: 1 + r/n)^n - 1, where r is the nominal interest rate and n is the number of compounding periods per year. By plugging in the values, we can calculate these interest rates.

If the bond price is less than the face value ($3000), Amazon made a profit as it would be paying less than it received from the investors.