Independent solution

How to solve this Successive Discount Increments question

Setup

Setup

The bond is below redemption after coupon 9, so the post-coupon book-value increases are accumulations of discount.

d9=4,730−4,478=252d_9=4{,}730-4{,}478=252
d10=5,000−4,730=270d_{10}=5{,}000-4{,}730=270

Model

Model

Under the effective-interest method, each discount increment is the previous one accumulated at the yield.

d10=d9(1+i)d_{10}=d_9(1+i)

Compute

Compute

Take the ratio of the two consecutive increments.

1+i=270252=1.071428571+i=\frac{270}{252}=1.07142857
i=0.07142857i=0.07142857

Answer

Answer

The annual effective yield is 0.0714, choice E.

i≈0.0714(E)\boxed{i\approx0.0714\quad\text{(E)}}