5.6 You have just purchased a newly issued $1,000 five-year Vanguard Company bond at par.

This five-year bond pays $60 in interest semiannually. You are also considering the purchase of another Vanguard Company bond that returns $30 in semiannual interest payments and has six years remaining before it matures. This bond has a face value of $1,000.

a. What is effective annual return on the five-year bond?

b. Assume that the rate you calculated in part

(a) is the correct rate for the bond with six years remaining before it matures. What should you be willing to pay for that bond?

c. How will your answer to part

(b) change if the five-year bond pays $40 in semiannual interest?

Bond Concepts