Question

In: Finance

2. Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20...

2.

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) decline from 16 percent to 12 percent.
  
Bond price

a. What is the bond price at 16 percent?
  


  
b. What is the bond price at 12 percent?
  
Bond price


  
c. What would be your percentage return on investment if you bought when rates were 16 percent and sold when rates were 12 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  
Return on investment %

Solutions

Expert Solution

(a)-Price of the Bond at 16 percent

  • The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
  • The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
  • Here, the calculation of the Bond Price using financial calculator is as follows

Variables

Financial Calculator Keys

Figures

Par Value/Face Value of the Bond [$1,000]

FV

1,000

Coupon Amount [$1,000 x 10.00%]

PMT

100

Market Interest Rate or Yield to maturity on the Bond [16.00%]

1/Y

16

Maturity Period/Time to Maturity [20 Years]

N

20

Bond Price/Current market price of the Bond

PV

?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $644.27

(b)-Price of the Bond at 12 percent

Variables

Financial Calculator Keys

Figures

Par Value/Face Value of the Bond [$1,000]

FV

1,000

Coupon Amount [$1,000 x 10.00%]

PMT

100

Market Interest Rate or Yield to maturity on the Bond [12.00%]

1/Y

12

Maturity Period/Time to Maturity [20 Years]

N

20

Bond Price/Current market price of the Bond

PV

?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $850.61.

(c)-Percentage return on investment if the bond when rate is 16 percent and sold when rate is 12 percent

Percentage return on investment = [(Sale Value – Purchase price) / Purchase price] x 100

= [($850.61 – 644.27) / $644.27] x 100

= [$206.34 / $644.27] x 100

= 32.03%

jeff jeffy answered 2 hours ago
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