Final answer:
The cost of the $14,000 bond purchased at 96.75% is $13,545. The bond pays an annual interest of $735, and the annual yield on the bond is roughly 5.43%.
Step-by-step explanation:
Eva Rhodes is considering purchasing a bond with specific financial terms. Let's calculate the details one by one.
Cost of the Bond
The price of the bond is given as a percentage of its face value. To find the cost of the bond:
- Cost of the bond = Face value × Purchase price percentage = $14,000 × 96.75%
- Cost of the bond = $14,000 × 0.9675 = $13,545
Annual Interest Earned
The annual interest earned on the bond is:
- Annual interest = Face value × Interest rate = $14,000 × 5.25%
- Annual interest = $14,000 × 0.0525 = $735
Annual Yield
Annual yield is the percentage of the cost of the bond that the annual interest represents.
- Annual yield = (Annual interest ÷ Cost of the bond) × 100% = ($735 ÷ $13,545) × 100%
- Annual yield = 5.428% (approximately 5.43%)
In this context, when interest rates rise, as shown in the examples given, the bond prices decrease, whereas if the interest rates fall, bond prices increase.