Find the rate of return

Allied Materials needs $3 million in debt capital for expanded composites manufacturing. It is offering small-denomination bonds at a discount plice of $800 for a 4% $ 1000 bond that matures in 20 years with interest payable semiannually.

What nominal and effective interest rates per year, compounded semiannually, will Allied Materials pay an investor?

The HVAC engineer for a company constructing one of the world’s tallest buildings (Shanghai Financial Center in the Peoples’ Republic of China) has requested that $500,000 be spent now during construction on software and hardware to improve the efficiency of the environmental control systems. This is expected to save $10,000 per year for 10 years in energy costs and $700,000 at the end of 10 years in equipment refurbishment costs.

Find the rate of return by hand and by computer.

Solution: