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 16 percent to 9 percent. a. What is the bond price at 16 percent? Bond price b. What is the bond price at 9 percent? Bond price c. What would be your percentage return on investment if you bought when rates were 16 percent and sold when rates were 9 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Return on investment %

Answer 1

Summary of Answers

Question	Answer
A	644.27
B	1091.29
C	69.38%

Workings

Concept

Price of the bond is equal to (present value of coupan + Present Value of principal) discounted at the yield to maturity

Solution to Question A

Bond Price at 16% YTM = Present Value of Coupans discounted at 16% + Present Value of Principal discounted at 16%

we are given both the present value of coupans and principal discounted at 16% in the table 10-1

Therefore Bond price at 16% YTM = 592.88 + 51.39 = 644.27

Solution to Question B

Bond Price at 9% YTM = Present Value of Coupans discounted at 9% + Present Value of Principal discounted at 9%

we are given both the present value of coupans and principal discounted at 9% in the table 10-1

Therefore Bond price at 9% YTM = 912.85 + 178.43 = 1091.29

Solution to Question C

Return on intestment = (Selling Price of the bond - Purchase price of the bond) / Purchase Price of the bond

Return on investment = (1091.29-644.27) / 644.27 = 447.02 / 644.27 = 69.38%