You are considering purchasing a consol that promises annual payments of $4. a.

Question

You are considering purchasing a consol that promises annual payments of $4. a. If the current interest rate is 3 percent, what is the price of the consol? Instructions: Enter your response to the nearest penny (two decimal places). The price of the consol is $ b. You are concerned that the interest rate may rise to 4 percent. Compute the percentage change in the price of the consol and the percentage change in the interest rate. Compare them. Instructions: Enter your response for dollar amounts rounded to the nearest penny (two decimal places ) and responses for percentages rounded to the nearest tenth (one decimal place). The new price of the consol would be $ The price of the consol falls by % and the interest rises by %. c. Your investment horizon is one year. You purchase the consol when the interest rate is 3 percent and sell it a year later, following a rise in the interest rate to 4 percent. What is your holding period return? Instructions: Enter your response rounded to the nearest tenth (one decimal place). Your holding period return is %

Explanation / Answer

a. Price of the concol = 4/0.03= 133.33

b. new price of the comcol = 4/0.04 = 100.00

c. price of consol falls by = 33.33/133.33 = 25.00% and the rate rises by 1%

d. holding period return = 25.00% (same as c.)

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