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# ABC Corporations recently issued bonds paying interest semiannuall

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ABC Corporation\'s recently issued bonds paying interest
semiannually and maturing in 10 years. The face value of
each bond is \$1000, and 6.8% is the nominal interest rate.
(a) What is the effective interest rate an investor receives?
(b) If a 1.5% fee is deducted by the brokerage firm from
the initial \$1000, what is the effective annual interest rate
paid by ABC Corporation?
Solution
1. Effective interest Rate = (1+R/2)^2 -1 here R is the
interest rate paid semiannually.
Effective interest rate = (1+6.8%/2)^2 -1 = .069156 =
6.915%
2.
Effective annual interest rate = Interest amount / Net
proceeds from bonds
Net proceeds from the bond = 1000*(1-1.5%)=\$985
Interest amount=6.915%*1000=69.15
So
Effective annual interest rate =69.15/985=7.02%

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ABC Corporation\'s recently issued bonds paying interest semiannually and maturing in 10 years. The face value of each bond is \$1000, and 6.8% is the nominal interest rate. (a) What is the effective interest rate an investor receives? (b) If a 1.5% fee is deducted by the brokerage firm from the initial \$1000, what is the effective annual interest rate paid by ABC Corporation? Solution 1. Effective interest Rate = (1+R/2)^2 -1 here R is the interest rate paid semiannually. Effective interest rate = (1+6.8%/2)^2 -1 = .069156 = 6.915% 2. Effective annual interest rate = Interest amount / Net pr ...
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