Question

Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decrease from 25 to 20 percent. a. What is the bond price at 25 percent? b. What is the bond price at 20 percent? c. What would be your percentage return on the investment if you bought when rates were 25 percent and sold when rates were 20 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(10*1000/100)/(1 + 25/100)^k]     +   1000/(1 + 25/100)^20

k=1

Bond Price = 406.92

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(10*1000/100)/(1 + 20/100)^k]     +   1000/(1 + 20/100)^20

k=1

Bond Price = 513.04

c

Percent age return = (selling price/purchase price-1) = (513.04/406.92-1)=26.08%