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) decline from 20 percent to 13 percent.

a. What is the bond price at 20 percent?

b. What is the bond price at 13 percent?

c. What would be your percentage return on investment if you bought when rates were 20 percent and sold when rates were 13 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

(a)-Price of the Bond at 20 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 [20.00%]	1/Y	20
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) = $513.04.

(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 [13.00%]	1/Y	13
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) = $789.26.

(c)-Percentage return on investment if the bond bought when rate is 20 percent and sold when rate is 13 percent

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

= [($789.26 - $513.04) / $513.04] x 100

= [$276.22 / $513.04] x 100

= 53.84%