Question

you buy a bond with a $1,000 par value today for a price of $875. the bond has 6 years to maturity and makes annual coupon payments of $75 per year. you hold the bond to maturity, but you do not reinvest any of your coupons. what was your effective ear over the holding period?

Answer 1

The effective annual rate will be 8.7827.

What is meant by effective annual interest rate (EAR)?

The effective annual interest rate (EAR) is a measure of interest that takes into account both the exact cost of a loan or credit card as well as the actual rate of return on an investment or savings account. The effects of compound interest over time are taken into account by the EAR.

The interest rate that accounts for compounding over a specific time period is called the Effective Annual Interest Rate (EAR). The rate of interest that an investor can earn (or pay) in a year after taking into account compounding is known as the effective annual interest rate, to put it simply.

Effective yearly interest rate = (1 + (nominal rate / number of compounding periods)) (number of compounding periods) - 1. The formula and calculations are as follows.

Take 1000 plus 6(75) to get 1450, which equals FV.

calculation N=6 PV=-875 PMT = 0.

I/Y => 8.7827

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