A Sunfish bond is paying 10 percent interest for 20 years on a semiannual basis. Assume interest rates in the market (yield to maturity) decline from 12 percent to 8 percent: (Use a Financial calculator to arrive at the answers. Do not round intermediate
A Sunfish bond is paying 10 percent interest for 20 years on a semiannual basis. Assume interest rates in the market (yield to maturity) decline from 12 percent to 8 percent: (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answers to 2 decimal places.)
a. What is the bond price at 12 percent? Bond price $
b. What is the bond price at 8 percent? Bond price $
c. What would be the percentage return on an investment bought when rates were 12 percent and sold when rates are 8 percent?
Return on investment %
Homework Answers
a.Information provided:
Par value= future value= $1,000
Coupon rate= 10%/2= 5% per semi-annual period
Coupon payment= 0.05*1,000= $50
Time= 20 years82= 40 semi-annual periods
Yield to maturity= 12%/2= 6% per semi-annual period
The price of the bond is calculated by computing the present value.
The present value is computed by inputting the below in a financial calculator:
FV= 1,000
PMT= 50
N= 40
I/Y= 6
Press the CPT key and PV to compute the present value.
The value obtained is 849.54.
Therefore, the price of the bond at 12% yield to maturity is $849.54.
b. Information provided:
Par value= future value= $1,000
Coupon rate= 10%/2= 5% per semi-annual period
Coupon payment= 0.05*1,000= $50
Time= 20 years82= 40 semi-annual periods
Yield to maturity= 8%/2= 4% per semi-annual period
The price of the bond is calculated by computing the present value.
The present value is computed by inputting the below in a financial calculator:
FV= 1,000
PMT= 50
N= 40
I/Y= 4
Press the CPT key and PV to compute the present value.
The value obtained is 1,197.93
Therefore, the price of the bond at 8% yield to maturity is $1,197.93
c.Percentage return= Sale price - Purchase price / Purchase price*100
= $1,197.93 - $849.54 - $849.54*100
= $348.39/ $849.54*100
= 0.4101*100
= 41.01%.
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