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

Question

Refer 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 12 percent to 10 percent.
  
a. What is the bond price at 12 percent?

b. What is the bond price at 10 percent?

c. What would be your percentage return on investment if you bought when rates were 12 percent and sold when rates were 10 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Explanation / Answer

Answer a.

Face Value of Bond = $1,000
Annual Coupon Rate = 10%
Interest Rate = 12%
Time to Maturity = 20 years

Price of Bond = $850.61

Answer b.

Face Value of Bond = $1,000
Annual Coupon Rate = 10%
Interest Rate = 10%
Time to Maturity = 20 years

Price of Bond = $1,000

Answer c.

Percentage Return = (Selling Price - Purchase Price) / Purchase Price
Percentage Return = ($1,000 - $850.61) / $850.61
Percentage Return = 17.56%

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