A municipality needs funding for upcoming infrastructure (water and sewer line) repair or replacement. They issue a series of $1,000, 6% semiannual, 11-year bonds. The bonds are initially sold at a discount for $925.

A)

If you buy a bond and sell it for $820 immediately following the 10^th interest payment, what is your effective annual rate of return?

ANSWER: 4.48%

B)

If you buy a bond for $925, plan to sell it immediately following the 16^th interest payment, and want to earn 8% compounded semiannually on your money, what must be the selling price?

ANSWER: $1077.77

C)

You want to buy one of these bonds from a friend who has held the bond for 2 full years, receiving 4 semiannual payments. You plan to keep the bond to maturity and want to earn 8% semiannual on the investment. What is the most you should pay for it?

ANSWER THIS PART