Question

Please Solve

Question 6 1 pts You buy a 5% coupon bond for $1000 and sell it for $1,200 after a year. Your rate of return is _ _%. Question 7 1 pts If a security you can buy today for $200 pays $110 next year and $121 the year after that. Its yield to maturity is __ _%. Question 8 1 pts If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is ___%.

Answer 1

6). Rate of Return = [Selling Price - Purchase Price + Coupon Payment] / Purchase Price

= [$1200 - $1000 + $50] / $1000 = $250 / $1000 = 0.25, or 25%

7). YTM = [{Coupon Payment(Year 1) + Coupon Payment(Year 2)} / Purchase Price]^1/n - 1

= [{$110 + $121} / $200]^1/2 - 1

= [$231 / $200]^1/2 - 1

= [1.155]^1/2 - 1

= 1.0747 - 1 = 0.0747, or 7.47%

8). Required Return = Annual Interest Payment / Price of Perpetuity = $25 / $500 = 0.05, or 5%