Bonds effective interest rate

mdhmom2006 · #1 Mar 28, 2007, 11:08 AM

Assume Suzanne Weiser pays $1,040 for a five-year, $1,000 bond paying 8 percent interest. Is the effective (Market) interest rate less than, equal to, or greater than 8 percent? How can you determine this.

KongTheKonqueror · Mar 28, 2007, 09:32 PM

The amount paid for the bond is greater than the par value of the bond so the bond was sold at a premium. Since the bond was sold at a premium, the market rate is less than the 8 percent coupon rate of the bond.

OR

If you have a financial calculator,
The payment received is 1000*.08 or $80
The number of periods is 5.
The future value is $1,000
The present value would be -$1040

Then solving for the market rate we get 7.02%



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