QUESTION 4 10 points Save Answer ATT sold 2 Billion in bonds

QUESTION 4 10 points Save Answer AT&T; sold $2 Billion in bonds to help fund the acquisition of DirectTV. The nominal yearly interest rate is 6%, compounded semiannually. Dr. Leitch buys a $5,000 face value bond for $4,500 today (June 2018) and the bond matures 25 years from today. Dividends are paid semiannually. If the bond is held to maturity in 25 years, what is the nominal yearly interest earned on the bond? 6.0% 3.6% 7.2% None of these numerical values. 3.0%

Solution

He buys bod for $4500 today ahdnthis bond is maturing agter 25 years

Value of Bond is calculated as Sum of Present value of Cash flow to be accrued in future with appropriate discount rate

Dividend to receive semiannually is =5000*(6%/2)=150

We need to compound interest rate semiannual basis

Now we can find Nominal Yield( Nominal Yearly interest )

We have 50 cycles of payment because dividend get paid semi annually and face value of bond at maturity

4500=150/(1+r)+150/(1+r)^2+150/(1+r)^3+...+5150/(1+r)^50

r=3.39467%

That is Annual Nominal rate earned will be =3.3947*2=6.7894%