The rate of return of a bond. Introduction: Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Question

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Answer 1

Question

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

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Students have asked these similar questions

Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 22 years. Assume you purchase a bond that costs $50. a. What is the exact rate of return you would earn if you held the bond for 22 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $50 in 2017 at the then current interest rate of .24 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2039. What annual rate of return will you earn over the last 11 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 18 years. Assume you purchase a bond that costs $100. a. What is the exact rate of return you would earn if you held the bond for 18 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $100 in 2020 at the then current interest rate of .22 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2038. What annual rate of return will you earn over the last 10 years?

I am thinking about buying a $100 heineken corporate bond. The bond was issued on Nov. 2005 with a coupon rate of 7.5% per year and it matures on Oct. 31, 2025. If I purchase the bond on Nov. 1, 2021 for $93.12, will I earn a return at least 8.0% per year (nominal) on the investment? Assume coupons are paid twice per year (on April 30 and October 31). You must draw a cash flow diagram to get full credit for this problem.

Answer 2

Question

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

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Answer 3

Question

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

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Answer 4

Question

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

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Answer 5

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

Answer 6

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

Answer 7

Chapter 4, Problem 16QP

a)

Summary Introduction

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer 8

a)

Expert Solution

Answer to Problem 16QP

A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given information:

Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100($50×2).

P×(1+r)t=FV$50×(1+r)20=$100(1+r)20=$100$50(1+r)20=2

1+r=2120r=1.0353−1r=0.0353 or 3.53%

Hence, the rate of return is 3.53% per year.

Answer 13

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

Answer 14

b)

Summary Introduction

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

Answer 15

b)

Expert Solution

Answer to Problem 16QP

The value of the bond in 2025 will be $50.5.

Answer 16

b)

Expert Solution

Answer 17

b)

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Given information:

Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.

The formula to calculate the future value:

FV=PV×(1+r)t

Where,

“FV” refers to the future value or the current market value

“PV” refers to the present value

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

FV=PV×(1+r)t=$50×(1+0.001)10=$50×1.0100=$50.5

Hence, the future value of investment after 10 years is $50.5.

Answer 20

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

Answer 21

c)

Summary Introduction

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer 22

c)

Expert Solution

Answer to Problem 16QP

The bond has to fetch a return of 7.18% per year to double its value in 2035.

Answer 23

c)

Expert Solution

Answer 24

c)

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

Given information:

Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the bond value until the value of the bond doubles in 2035.

The formula to calculate the rate of return:

P×(1+r)t=FV

Where,

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

“FV” refers to the future value or the current market value

Compute the rate of return:

The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101($50.50×2).

P×(1+r)t=FV$50.50×(1+r)10=$101(1+r)10=$101$50.50(1+r)10=2

1+r=2110r=1.0718−1r=0.0718 or 7.18%

Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.

Answer 27

Ch. 4.1 - Prob. 4.1ACQ Ch. 4.1 - Prob. 4.1BCQ Ch. 4.1 - In general, what is the future value of 1 invested...Ch. 4.2 - What do we mean by the present value of an...Ch. 4.2 - Prob. 4.2BCQ Ch. 4.2 - Prob. 4.2CCQ Ch. 4.2 - Prob. 4.2DCQ Ch. 4.3 - What is the basic present value equation?Ch. 4.3 - Prob. 4.3BCQ Ch. 4 - If you invest 500 for one year at a rate of 8...

The rate of return of a bond. Introduction: Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Concept explainers

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer to Problem 16QP

Explanation of Solution

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

Answer to Problem 16QP

Explanation of Solution

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer to Problem 16QP

Explanation of Solution

Want to see more full solutions like this?

Chapter 4 Solutions

The rate of return of a bond. Introduction: Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Concept explainers

To calculate: The rate of return of a bond. Introduction: Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer to Problem 16QP

Explanation of Solution

To calculate: The future value of the bond. Introduction: The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

Answer to Problem 16QP

Explanation of Solution

To calculate: The rate of return. Introduction: Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

Answer to Problem 16QP

Explanation of Solution

Want to see more full solutions like this?

Chapter 4 Solutions

To calculate: The rate of return of a bond.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.

To calculate: The future value of the bond.

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.

To calculate: The rate of return.

Introduction:

Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.