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

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 12 percent to 4 percent. a. What is the bond price at 12 percent? Bond price b. What is the bond price at 4 percent? Bond price c. What would be your percentage return on investment if you bought when rates were 12 percent and sold when rates were 4 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Return on investment

Explanation / Answer

Answer to Part a.

Using Table 10-1,

Bond price at 12% is $850.61

Answer to Part b.

Using Table 10-1,

Bond price at 4% is $1,815.42

Answer to Part c.

Return on Investment = (Selling Price + Coupon – Purchase Price) / Purchase Price * 100
Coupon Rate = 10%
Coupon = $1000 * 10% = $100

Return on Investment = ($1,815.42 + $100 - $850.61) / $850.61 * 100
Return on Investment = 1,064.81 / 850.61 * 100
Return on Investment = 125.18%

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