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    mdhmom2006's Avatar
    mdhmom2006 Posts: 1, Reputation: 1
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    #1

    Mar 28, 2007, 11:08 AM
    Bonds effective interest rate
    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's Avatar
    KongTheKonqueror Posts: 75, Reputation: 13
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    #2

    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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