Independent solution

How to solve this Leveraged Bond Investment Yield question

Setup

Setup

Net each monthly coupon receipt against the monthly financing cost. The investable cash flow is 75 − 13.33 = 61.67 per month, with 8,000 returned at month 120.

net monthly cash=75−13.33=61.67\text{net monthly cash}=75-13.33=61.67

Model

Model

Solve the 120-month internal-rate equation for monthly yield j, then convert j to an annual effective rate by compounding twelve times.

8000=61.67a120‾∣ j+8000(1+j)−1208000=61.67a_{\overline{120}|\,j}+8000(1+j)^{-120}

Compute

Compute

The monthly root is 0.770875%. Annualization gives 9.65%.

j=0.00770875,i=(1+j)12−1=0.0965j=0.00770875,\quad i=(1+j)^{12}-1=0.0965

Answer

Answer

The calculation gives 9.65% for leveraged bond investment yield, matching published choice B.

i=9.65%(B)\boxed{i=9.65\%\quad\text{(B)}}

Calculator reproduction

BA II Plus keystrokes

Check END/BGN, period, sign, TVM, and cash-flow setup

  1. 2nd CLR TVM; 120 N; 8000 +/- PV; 61.67 PMT; 8000 FV; CPT I/Y0.770875Monthly internal rate.
  2. 2nd ICONV; 0.770875 NOM; 12 C/Y; CPT EFF9.65Convert the monthly rate to annual effective.