One hundred $1,000 bonds having a bond rate of 8% per year payable quarterly are purchased for $97,500, kept for 4 years, and sold for $95,000. Determine the effective annual return on the bond investment.

The general expression relating the terms associated with a bond is:

P = Vr(P/A i%,n) + F(P/F i%,n)

where :

P = purchase price of a bond

F= the sales price (or redemption value) of a bond

V = the par or face value of a bond

r = the bond rate (coupon rate) per interest period

i = the yield rate (return on investment or rate of return) per interest period

n = the # of interest (coupon) payments received by the bondholder

A = Vr = the interest or coupon payment received per interest period