Question

Consider the following bond purchased at $800 in 2018. F-1000; C-100; N-5; P 800 5. a. What is the yield to maturity? (This is equal to the market interest rate prevailing irn 2018) If the interest rate rises to 20% in 2019 what is the price of the bond? b. Solve the following equation: 0.2 (100+(1000-P)/5)/(1000+P)/2 c. If the investor sold the bond in 2019 without holding till maturity did he/she make a profit or a loss? What is the rate of return in 2019? d.

Answer 1

F = 1000, C = 100, N = 5, P = 800 Yield to Maturity = C + (F - P)/n/(F + P)/2 = 100 + (1000 - 800)/5/(1000 + 800)/2 = 100 + (200)/5/1800/2 = 100 + 40/90 = 140/900 = .1556 YTM = 15.56% Ans i = 20%, then p = ? .2 = 100 + (1000 - P)/5/(1000 + P)/2 = > .2 [1000 + P/2] = 100 + (1000 - P)/5 So 100 + P/10 = 100 + 1000 - P/5 So 5 P = 10000 - 10 P so 15 P = 10000 P = 666.67$ Now suffered a loss rightarrow Because price of bond reduced in 2019 & it is sold w/o free maturity. Rate of return in 2019, as yield to maturity uparrow, bond price fall, Because inverse relation b/w bond price & yield exist. Rate of Return is -ve = 666.67 - 800/800 times 100 = -16.67%