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    Bond Valuation "Effective" Annual Interest Rate

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    You are considering a 10-year, $1000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.16%, then how much should you be willing to pay for the bond?

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    Solution Preview

    Formula for converting effective rate to nominal rate is (1+i/n)^n - 1

    where i = nominal rate and n = no. of times compounded in a yr.

    Using the formula (convert the 8.16% effective rate to a nominal rate) ...

    Solution Summary

    This posting gives a detailed solution to the student's question.

    $2.19