Question

On February 2, 2016, an investor held some Province of Ontario stripped coupons in a self-administered RRSP at ScotiaMcLeod, an investment dealer. Each coupon represented a promise to pay $100 at the maturity date on February 2, 2022, but the investor would receive nothing until then. The value of the coupon showed as $89.11 on the investor’s screen. This means that the investor was giving up $89.11 on February 2, 2016, in exchange for $100 to be received just less than six years later.

a. Based upon the $89.11 price, what rate was the yield on the Province of Ontario bond? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Rate of return             %

b. Suppose that on February 2, 2017, the security’s price was $91.00. If an investor had purchased it for $89.11 a year earlier and sold it on this day, what annual rate of return would she have earned? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Annual rate of return             %

c. If an investor had purchased the security at the market price of $91.00 on February 2, 2017, and held it until it matured, what annual rate of return would she have earned? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Annual rate of return             %

Answer 1

The calculation for each part is shown below

Following shows the working