## Two bonds are available on the market as follows: Bond 1: Face value $250, 5 years to maturity at a (simple) interest rate of 5%. Bond 2: F

Question

Two bonds are available on the market as follows: Bond 1: Face value $250, 5 years to maturity at a (simple) interest rate of 5%. Bond 2: Face value $350, 3 years to maturity at a (simple) interest rate of r. Given that both bonds yield the same interest to maturity, calculate r.

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2021-10-13T05:24:24+00:00
2021-10-13T05:24:24+00:00 1 Answer
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## Answers ( )

The value of r is

5.95%Step-by-step explanation:The formula of the simple interest is I = P r t, where

Bond 1:∵ The face value is $250

∴ P = 250

∵ The value is in the bond for 5 years

∴ t = 5

∵ The simple interest rate is 5%

∴ r = 5% = 5 ÷ 100 = 0.05

∵ I = P r t

– Substitute the values of P, r and t in the rule

∴ I = (250)(0.05)(5) = 62.5

∴

The interest of Bond 1 is $62.5Bond 2:∵ The face value is $350

∴ P = 350

∵ The value is in the bond for 3 years

∴ t = 3

∵ The simple interest rate is r

∵ I = P r t

– Substitute the values of P and t in the rule

∴ I = (350)(r)(3) = 1050 r

∴

The interest of Bond 2 is 1050 r∵ The both bonds yield the same interest to maturity

– Equate the interests of bonds 1 and 2

∵ 1050 r = 62.5

– Divide both sides by 1050

∴

r = 0.0595– Multiply it by 100% to change it to percentage

∵ r = 0.0595 × 100% = 5.95%

∴ r = 5.95%

The value of r is 5.95%Learn more:You can learn more about interest in brainly.com/question/11149751

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