There is a bond that has a quoted price of 103.203 and a par value of $2,000. The coupon rate is 6.81 percent and the bond matures in 23 years. If the bond makes semiannual coupon payments, what is the effective annual interest rate

6.53%

Explanation:

You can use an Excel worksheet to solve this.

The bond pays semi-annual coupons so you need to convert these measures to periodic measures:

Coupon = 6.81% * 2,000 * 0.5 = $68.10

Maturity term = 23 * 2 = 46 semi annual periods

Present value = 2,000 * 103.203 quoted price = $2,064.06

Use the Rate function as attached:

Periodic rate = 3.2694%

Annual rate = 3.2694 * 2

= 6.53%

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