Question

a.        Suppose you purchase a 20-year,8% coupon bond with a yield to maturity of 10%. For a face value of $1000, what should be the initial price of the bond assuming that the bond is paying interest semi-annually?

b.       If the bond’s yield to maturity changes to be 12%, what will its price be five years later?

c. If you purchased the bond at THE PRICE YOU COMPUTED AT (a) and sold it 5 years later, what would the rate of return of your investment be?

Answer 1

Caculate PV using financial cal:

enter:

FV = 1040

pmt =40

i=4.88

n=40

calculate pv =852.43$ this is the price of bond.

B)

enter following in financial cal:

FV =1040

pmt =40

i=5.8

n=30

calculate PV : 754.21

c) HPR =(754.21+400-852.43)/852.43=0.3540 or 35.40%