One Payment Stream Is Being Compared to Another

question 157

Multiple Choice

One payment stream is being compared to another. The first option is for $600 quarterly payments over 8 years at an interest rate of 4% compounded quarterly. The second option is for $50 monthly payments over 8 years, with interest compounded monthly. Determine the nominal rate of interest to be offered on the second option for both options to have equal future values.

• A) 10.31%
• B) 10.21%
• C) 10.11%
• D) 11.01%
• E) 10.93%

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Definitions:

Yield To Maturity

Yield to maturity is the total return anticipated on a bond if the bond is held until the end of its lifetime.

Coupon Rate

The interest rate stated on a bond or other fixed-income security, representing the annual interest payment divided by the bond's face value.

Market Price

The real-time price for buying or selling an asset or service.

Face Value

The nominal or dollar value printed on a security or currency, indicating its legal worth.