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Bond offer
Rate of return
$104=$6 x (1+r)^(-1) + $6 x (1+r)^(-2) + $106 x (1+r)^(-3)
If r is 5%, price is $102.72
If r is 4%, price is $105.55r is approx = 4% + (105.55-104)/(105.55-102.72) * 1% = 4.55%
Sorry but I cannot get the 4.55% value for r when I am using the rate of return formulae.
Could you please, Sir or anybody else, give me a hand with this??
Many Thanks in advance
We need the interest rate that gives a MV of 104.
The difference between the PV’s at 4% and 5% is 105.55 – 102.72 = 2.83.
So a change of 1% gives a change in PV of 2.83.To get a PV of 104, we need it to change from 105.55 at 4% to a value of 104 – i.e. a change of 105.55 – 104 = 1.55.
Since 2.83 is a change of 1%, then 1.55 is a change of 1.55/2.83 x 1% = 0.55
Therefore the rate must be 4% x 0.55% = 4.55%
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