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  • 7% 8.02% 9% Trial & Error:: Year 1 0.93458 Using Formula - 0.93458 0.92593 0.91743

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    Kin Lee
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    This document contains calculations to determine the effective interest rate (EIR) of a 3-year bond with $3,000,000 face value paying $180,000 in interest annually. It uses the present value formula to calculate values at 7%, 8.02%, and 9% rates. By interpolation, it determines the EIR is 8.02%, as the difference in PV at 7% and 9% is closest to 0. The bond has a market price of $2,845,374, calculated as the sum of the present values of the annual cash flows at the EIR.

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    Interpolation for Eir

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    This document contains calculations to determine the effective interest rate (EIR) of a 3-year bond with $3,000,000 face value paying $180,000 in interest annually. It uses the present value formula to calculate values at 7%, 8.02%, and 9% rates. By interpolation, it determines the EIR is 8.02%, as the difference in PV at 7% and 9% is closest to 0. The bond has a market price of $2,845,374, calculated as the sum of the present values of the annual cash flows at the EIR.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    39 views3 pages

    7% 8.02% 9% Trial & Error:: Year 1 0.93458 Using Formula - 0.93458 0.92593 0.91743

    Uploaded by

    Kin Lee
    This document contains calculations to determine the effective interest rate (EIR) of a 3-year bond with $3,000,000 face value paying $180,000 in interest annually. It uses the present value formula to calculate values at 7%, 8.02%, and 9% rates. By interpolation, it determines the EIR is 8.02%, as the difference in PV at 7% and 9% is closest to 0. The bond has a market price of $2,845,374, calculated as the sum of the present values of the annual cash flows at the EIR.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    of 3

    YEAR 1

    7% 0.93458
    USING FORMULA -> 0.93458
    8.02% 0.92593
    9% 0.91743
    TRIAL & ERROR:
    PRINCIPAL - FACE AMOUNT
    INTEREST
    PRESENT VALUE
    PRINCIPAL
    INTEREST
    PRESENT VALUE
    MARKET PRICE 6%
    PRINCIPAL
    INTEREST
    PRESENT VALUE
    INTERPOLATION:
    PV @ 7% 8.02%
    PV @ EIR% 8.02%
    PV @ 9% 8.02%
    YEAR 2 YEAR 3 PV ANNUITY
    0.87344 0.81630 2.62432
    0.87344 0.81630 2.62432
    0.85734 0.79383 2.57710 2.57710
    0.84168 0.77218 2.53129 2.53129
    CASHFLOW PV @ 7% PV @ EIR%
    3,000,000 0.81630 2,448,894
    180,000 2.62432 472,377
    2,921,271
    3,000,000 0.79383 2,381,497
    180,000 2.57710 463,877
    2,845,374
    ->NIR 2,845,374
    3,000,000 0.77218
    180,000 2.53129

    DIFF EIR PV DIFF


    7% 2,921,271
    2% 2,845,374 149,087
    9% 2,772,183
    PV @ 9%

    2,316,550
    455,633
    2,772,183
    BREAKDN R&P
    75,896 50.91%

    73,191 49.09%
    149,087 100%

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