Problem 4-16 Calculating Rates of Return [LO 3]

In March 2020, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $2,000 in March 2045, but investors would receive nothing until then. Investors paid DMF $790 for each of these securities; so they gave up $790 in March 2020, for the promise of a $2,000 payment 25 years later.

A.)Assuming you purchased the bond for $790, what rate of return would you earn if you held the bond for 25 years until it matured with a value $2,000?

B.)Suppose under the terms of the bond you could redeem the bond in 2030. DMF agreed to pay an annual interest rate of .9 percent until that date. How much would the bond be worth at that time?

C.) In 2030, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2045. What annual rate of return will you earn over the last 15 years?

A.) RATE OF RETURN:3.79

B.) BOND VALUE: 862.46

C.)RATE OF RETURN: ???