Question

Miguel purchases a $21,0000 8% fifteen-year par-value bond having annual coupons for a price to provide a 6% annual yield if the bond is held to maturity. Five years later, just after the receipt of the fifth coupon, he sells it at a price to provide the new purchaser a yield to maturity of 7%. Find the difference between Miguel's book value B and the invoice price. (Round your answer to the nearest cent.) $ What was Miguel's actual yield for the five-year period? (Round your answer to three decimal places.)

Answer 1

Answer:

Purchase price = pv(rate,nper,pmt,fv)

rate = 6%

nper = 15

pmt = 8%*21000 = 1680

fv =21000

Purchase price = pv(6%,15,1680,21000)

Purchase price = $ 25079.14

Book Value at year 5 =  pv(rate,nper,pmt,fv)

rate = 6%

nper = 10

pmt = 8%*21000 = 1680

fv =21000

Book Value at year 5 = pv(6%,10,1680,21000)

Book Value at year 5 = $ 24091.24

Invoice Price = pv(rate,nper,pmt,fv)

rate = 7%

nper = 10

pmt = 8%*21000 = 1680

fv =21000

Invoice Price =pv(7%,10,1680,21000)

Invoice Price = $ 22474.95

Difference in Book Value B5 and invoice price =  24091.24 - 22474.95

Difference in Book Value B5 and invoice price = $ 1616.29

Actual annual Yield for the 5 year = rate(nper,pmt,pv,fv)

Actual annual Yield for the 5 year =rate(5,1680,-25079.14,22474.95)

Actual annual Yield for the 5 year = 5%