Question

Two bonds are available on the market as follows:

Bond 1: Face value $250, 5 years to maturity at a (simple) interest rate of 5%.
Bond 2: Face value $350, 3 years to maturity at a (simple) interest rate of r.
Given that both bonds yield the same interest to maturity, calculate r. Give your answer as a percentage to the nearest hundredth of a percent. Do not include the percent symbol in your answer. (For example, the solution 0.0355 would be written 3.55)

Answer 1

Explanation:

Answer 2

5.95

Explanation:

For this we can use the formula

I=P0rt.

For the first bond, the total interest paid out is

I1=$250×5×5%=$62.50.

For the second bond, the total interest paid out is the same as the first, hence

62.50=$350×3×r,

and therefore we have

0.05952…

which is 5.95% to the nearest 0.01%.