A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It
ID: 2635314 • Letter: A
Question
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 $1,060. Further assume Ms. Bright paid 35 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.
What is the current price of the bond? Use Table 16-2
What is her dollar profit based on the bond
Explanation / Answer
The original bond was issued at 12%
Yield to maturity is now 10%
15 years remain to maturity
The bond price is $1,153.72 (As per table)
b. $1,153.72 Current price
1,060.00 Purchase price
$ 093.72 Dollar increase
c. Purchase Price $1,060.00
x 35% Margin $ 371.00 Purchase price paid in cash
d.
=93.72 / 371
= 25.26%
25.26% represents Ms. Bright
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