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Math Help - Check my answer on compounding interest please?

  1. #1
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    Check my answer on compounding interest please?

    I asked this question earlier, and i think i sovled it. could someone check it for me please? (sorry i cant do the symbols things)

    original question:
    Suppose you hold a bond that matures 3 months from today. Upon maturity, the bond pays you $100. The price of the bond is $96.50. What is the nominal interest rate associated with the bond, expressed as a compounded annual rate?

    1- find out what the interest rate it (i used the Pert method)
    96.5*e^3r=100
    e^3r=100/96.5
    3r=Ln(100/96.5)
    r=.012 more or less

    2- using the compounding formula to get the annual rate:
    1(1+r)^n
    1(1+.012)^12=1.154 more or less...

    so the answer would be 15.4% ..? odes this sound right?
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  2. #2
    MHF Contributor harish21's Avatar
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    Quote Originally Posted by mottin View Post
    I asked this question earlier, and i think i sovled it. could someone check it for me please? (sorry i cant do the symbols things)

    original question:
    Suppose you hold a bond that matures 3 months from today. Upon maturity, the bond pays you $100. The price of the bond is $96.50. What is the nominal interest rate associated with the bond, expressed as a compounded annual rate?

    1- find out what the interest rate it (i used the Pert method)
    96.5*e^3r=100
    e^3r=100/96.5
    3r=Ln(100/96.5)
    r=.012 more or less

    2- using the compounding formula to get the annual rate:
    1(1+r)^n
    1(1+.012)^12=1.154 more or less...

    so the answer would be 15.4% ..? odes this sound right?
    S = {S_0}   e^{rt}

    The time (t) is in years. 12 months = 1year , so 3 months = (3/12)=(1/4) year.
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