Question

A $1,000 par value bond was issued 15 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,025. Further assume Ms. Bright paid 20 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan. a. What is the current price of the bond? Use Table 16-2. (Input your answer to 2 decimal places.) X Answer is complete but not entirely correct. Price of the bond 1,342.38 X b. What is her dollar profit based on the bond's current price? (Do not round intermediate calculations and round your answer to 2 decimal places.) Answer is complete but not entirely correct. Dollar profit 342.38 X

Answer 1

a) The original bond was issued at 12%

Yield to maturity is now 10%

25 years remain to maturity

The bond price is $1,182.56

b) Dollar profit = 1182.56-1025

= $157.56

c) Purchase price paid in cash = 1025*0.2

= $205

d) Percentage return = Dollar price / purchase price paid in cash

= 158/205

= 0.7707 (or) 77.07%