Question

An engineer bought a $1000 bond of an American airline for $875 just after an interest payment had been made. The bond paid a 6% coupon interest rate semiannually. What nominal rate of return did the engineer receive from the bond if he held it 13.5 years until its maturity

Answer 1

Number of coupon payments = 13.5*2= 27

Coupon = 6%*1000/2= 30

Let rate be r

Present value of all future payments = $87

875 = 30*(1-1/(1+r)^27)/r + 1000/(1+r)^27

R= 3.74%

Nominal rate = 3.74%*2 = 7.49%