Suppose the government decides to issue a new savings bond that is guaranteed to double in...

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Suppose the government decides to issue a new savings bond thatis guaranteed to double in value if you hold it for 16 years.Assume you purchase a bond that costs $75. a. What is the exactrate of return you would earn if you held the bond for 16 yearsuntil it doubled in value? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.) b. If you purchased the bond for $75 in 2017 at thethen current interest rate of .21 percent year, how much would thebond be worth in 2025? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.) c. In 2025,instead of cashing in the bond for its then current value, youdecide to hold the bond until it doubles in face value in 2033.What annual rate of return will you earn over the last 8 years? (Donot round intermediate calculations and enter your answer as apercent rounded to 2 decimal places, e.g., 32.16.)

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4.2 Ratings (764 Votes)

First Question's Solution:

Bond Current Price	$ 75
Number of years	16
Interest Rate	4.5%	72/ numbers of years (Formula)

Note: Doubling rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72.

Second question's solution:

Particulars	Data	Formulas
Bond Current Price	$ 75
Interest Rate	0.21
Number of years	8
FV of bond in 2025	344.622974	FV formula in excel

As there is not given any coupon rate in second question.

Third question:

Particulars	Data	Formulas
Bond Current Price	$ (344.62)	Calculated in Q2
FV of bond in 2015	689.244	Double of 2025
Number of years	8
Return Rate	9.05%	Rate formula in excel

Doubling rule of 72 also derives 9% answer i.e.72/8 = 9%

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Transcribed Image Text

Suppose the government decides to issue a new savings bond thatis guaranteed to double in value if you hold it for 16 years.Assume you purchase a bond that costs $75. a. What is the exactrate of return you would earn if you held the bond for 16 yearsuntil it doubled in value? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.) b. If you purchased the bond for $75 in 2017 at thethen current interest rate of .21 percent year, how much would thebond be worth in 2025? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.) c. In 2025,instead of cashing in the bond for its then current value, youdecide to hold the bond until it doubles in face value in 2033.What annual rate of return will you earn over the last 8 years? (Donot round intermediate calculations and enter your answer as apercent rounded to 2 decimal places, e.g., 32.16.)