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A $1,000 par value bond was issued 20 years ago at a 10.50 percent coupon rate.

ID: 2682580 • Letter: A

Question

A $1,000 par value bond was issued 20 years ago at a 10.50 percent coupon rate. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 7.00 percent.

(a)

What is the current price of the bond? (Round "PV Factor" to 3 decimal places. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Current price of the bond $

(b)

Assume Ms. Russell bought the bond three years ago when it had a price of $1,030. What is her dollar profit based on the bond

Explanation / Answer

Facre value = FV = $1000, Copupon 10.5%. So PMT = 10.5%*$1000 = $105 Rate = 7%. Balance life = nper = 10yrs a) What is the current price of the bond? Current price = PV(Rate,nper,PMT,FV) = PV(7%,10,-105,1000) = $1,245.83 (b) Assume Ms. Russell bought the bond three years ago when it had a price of $1,030. What is her dollar profit based on the bond’s current price? Dollar profit = Current price - Buy prce = 1245.83 -1030 = $215.83 (c) Further assume Ms. Russell 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 bond to cover the interest costs on the loan. How much of the purchase price of $1,030 did Ms. Russell pay in cash? 30% of $1030 = $309.00 (d) What is Ms. Russell’s percentage return on her cash investment? Actual Invstemt is Cash +Loan whose Int is served from coupon pmts. So %reurn = (Current price - Buy prce)/Buy price = (1245.83 -1030)/1030 = 20.95%