Using Table 10-1 given below, assume interest rates in the market (yield to matu

Question

Using Table 10-1 given below, 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 5 years have passed and interest rates in the market have gone down to 12 percent. Now, using Table 10-2 for 15 years, what is the price of the bond?

c. What would your percentage return be if you bought the bonds when interest rates in the market were 14 percent for 20 years and sold them 5 years later when interest rates were 12 percent?

Table 10-1

Table 10-2

(10% Interest Payment, 20 Years to Maturity) Yield to Maturity 2% Bond Price $2,308.10 1,815.00 1,459.00 ,317.40 1,196.80 1090.90 1,000.00 1. 12 920.30 80.90 3789.50 353 .. 64.90 13.00 ...407.40 16 2 2596

Explanation / Answer

(a)

Assuming interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent.

Then the price of the bond= $735.30.

(b) Assume 5 years have passed and interest rates in the market have gone down to 12 percent. Now, using Table 10-2 for 15 years, the price of the bond = $864.11

(c) Your percentage return be if you bought the bonds when interest rates in the market were 14 percent for 20 years and sold them 5 years later when interest rates were 12 percent:

Bought at price $735.30 and sold at price $843.30

than the percentage return is = $108 / $735.30 * 100 = 14.68%

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