The table is based on bonds paying 10% interest for 20 years. Assume interest ra

Question

The table is based on bonds paying 10% interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11% to 8%.

A. What is the bond price at 11%?

B. What is the bond price at 8%?

C. What would be your percentage return on investment if you bought when rates were 11% and sold when rates were 8%?

Yield to maturity PV of coupons PV of principle Bond price 2% $1,635.14 $672.97 $2,308.11 4% 1,359.03 456.39 1,815.42 6% 1,146.99 311.80 1,458.80 7% 1,059.40 258.42 1,317.82 8% 981.81 214.55 1,196.36 9% 912.85 178.43 1,091.29 10% 851.36 148.64 1,000.00 11% 796.33 124.03 920.37 12% 746.94 103.67 850.61 13% 702.48 86.78 789.26 14% 662.31 72.76 735.07 16% 592.88 51.39 644.27 20% 486.96 26.08 513.04 25% 395.39 11.53 406.92

Explanation / Answer

A)

Bond price at 11%:

= $920.37

B)

Bond price at 8%:

= $1,196.36

C)
Return earned:

= ($1,196.36+$100-$920.37)/$920.37

= 40.85%

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