Answer :
The effective EAR over the holding period is 9.938% with TV as $1325 and PV as $825 with 5 years of annual compounding period.
What is EAR ?
The Effective Annual Interest Rate (EAR) is the interest rate that takes compounding over a given time period into consideration. Simply put, the effective annual interest rate is the rate of interest that an investor can earn (or pay) in a year after accounting for compounding.
EAR can be used to estimate the interest due on any debt, including loans, as well as the returns from investments like savings accounts and guaranteed investment certificates (GICs).
The annual equivalent rate (AER), effective rate, and effective interest rate are all terms used to refer to the effective annual interest rate. Compared to the APR, which is based on basic interest, this percentage rate is lower.
To solve the question :
Total value in 6 years :
(par value of bond + years to mature × (annual coupon payment))
= 1,000 + 5(65) = 1,325
Calculator entries for EAR are
PV = 825
TV = 1325
n = 5 years
[tex](PV)(1 + EAR)^{n}[/tex]= TV
[tex](825)(1+EAR)^{5}[/tex]= 1325
[tex](1+EAR)^{5}[/tex] = 1325/825
[tex](1+EAR)^{5}[/tex] = 1.606
EAR = [tex](1.606)^{1/5} - 1[/tex]
EAR = 1.09938 - 1
= 0.09938 × 100
= 9.938%
Hence, the effective EAR is 9.938%
To know more about, EAR, visit :
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