Question

In: Finance

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate....

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,040. Further assume Ms. Bright paid 20 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan.

a. What is the current price of the bond? Use Table 16-2. (Input your answer to 2 decimal places.)

b. What is her dollar profit based on the bond’s current price? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. How much of the purchase price of $1,040 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)

d. What is Ms. Bright’s percentage return on her cash investment? Divide the answer to part b by the answer to part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Solutions

Expert Solution

(a)

Current price of the Bond = Present value of the future Interest receipt + Present value of the maturity amount

Current price of the Bond =

A = Annual coupon = $1000*12% = $120

y = yield rate = 10% = 0.10

n= year to maturity = 15 year

MV = Matturity value = $1000

hence current price of the Bond =

=>current price of the Bond=$1152.12

-----------------------------------------------------------------------

(b)

Bond's original price = $1040

Bonds Current price = $1152.12

Coupon earnings in 3 year = $120*3 = $360

$ Profit = Current price-Purchase price+Interest income = $1152.12-$1040+$360 = $472.12.

Hence $ Profit =$472.12

----------------------------------------------------

(c)

Amount paid in cash = $1040*20% =$208

-----------------------------

(d)

percentage return on cash investment = $ profit / cash investment * 100 = [$472.12 / $208]*100 = 226.98%

-------------------------------------------------------------

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate....

A $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,090. Further assume Ms. Bright paid 40 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to...

QUESTION 5: A $1,000 par value bond was issued 25 years ago at a 12 percent...

QUESTION 5: A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,050. Further assume Ms. Bright paid 30 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the...

A $1,000 par value bond was issued five years ago at a coupon rate of 8...

A $1,000 par value bond was issued five years ago at a coupon rate of 8 percent. It currently has 15 years remaining to maturity. Interest rates on similar debt obligations are now 10 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer...

23 A $1,000 par value bond was issued five years ago at a coupon rate of...

23 A $1,000 par value bond was issued five years ago at a coupon rate of 12 percent. It currently has 25 years remaining to maturity. Interest rates on similar debt obligations are now 14 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your...

A $1,000 par value bond was issued five years ago at a coupon rate of 8...

A $1,000 par value bond was issued five years ago at a coupon rate of 8 percent. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 10 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer...

A $1,000 par value bond was issued five years ago at a coupon rate of 6...

A $1,000 par value bond was issued five years ago at a coupon rate of 6 percent. It currently has 8 years remaining to maturity. Interest rates on similar debt obligations are now 8 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer...

A 10 percent coupon bond was issued 2 years ago and sold at par value. Now,...

A 10 percent coupon bond was issued 2 years ago and sold at par value. Now, the required return on the same bond is 8 percent. What is the coupon rate today?

A $1,000 par value 12-year bond with a 14 percent coupon rate recently sold for $925....

A $1,000 par value 12-year bond with a 14 percent coupon rate recently sold for $925. What is the yield to maturity? Assume semiannual payments and submit your answer as a percentage rounded to two decimal places. To answer the question: (1) Describe and interpret the assumptions related to the problem. (2) Apply the appropriate mathematical model to solve the problem. (3) Calculate the correct solution to the problem.

A company issued $1,000 par value bond at 6% coupon rate. The bond will mature in...

A company issued $1,000 par value bond at 6% coupon rate. The bond will mature in 6 years. Current market yield for this bond is 7%. If the coupon is paid semi-annually, what would be the value of this bond? Group of answer choices $951.68 $682.29 $973.36 $952.33

Bond A Bond B Maturity (years) 20 30 Coupon rate (%) 12 8 Par value $1,000...

Bond A Bond B Maturity (years) 20 30 Coupon rate (%) 12 8 Par value $1,000 $1,000 If both bonds had a required rate of return of 10%, what would the bonds’ prices be? Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider both bonds to be selling at a discount, premium, or at par?

Subjects