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

Question

8. Go 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 11 percent to 8 percent: a. What is the bond price at 11 percent? b. What is the bond price at 8 percent? e. What would be your percentage return on investment if you bought when rates were 11 percent and sold when rates were 8 percent? 9. Look at Table 10-1 again, and now assume interest rates in the market (yield to maturity) increase from 9 to 12 percent. a. What is the bond price at 9 percent? b. What is the bond price at 12 percent? c. What would be your percentage return on the investment if you bought when rates were 9 percent and sold when rates were 12 percent? 10. Using Table 10-1, assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent. a. What is the price of the bond? b. Assume five years have passed and interest rate in the market have gone

Explanation / Answer

8) Note assumed annual compounding

a) Bond price when market interest rate is 11%

b) Bond price when market interest rate is 8%

c)

Return:

= ($1,196.36-$920.37)/$920.37

= 30%

Note: Assumed purchased bond sold on the immediate next day after change in interest rates. (Next day occured)

Face value (FV) $                                      1,000 Coupon rate 10.00% Number of compounding periods per year 1 Interest per period (PMT) $                                   100.00 Number of years to maturity 20 Number of compounding periods till maturity (NPER) 20 Market rate of return/Required rate of return 11.00% Market rate of return/Required rate of return per period (RATE) 11.00% Bond price PV(RATE,NPER,PMT,FV) Bond price $                                   920.37 PV(11%,20,100,1000)*-1

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