Question

Refer to Table 10-1, assume interest rates in the market (yield to maturity) are 9 percent for 20 years on a bond paying 10 percent a. What is the price of the bond? Bond price b. Assume 15 years have passed and interest rates in the market have gone up to 12 percent. Now, using Table 10-2 for 5 years, what is the price of the bond? Bond price nces c. What would your percentage return be if you bought the bonds when interest rates in the market were 9 percent for 20 years and sold them 15 years later when interest rates were 12 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Retun on investment Table 10-1 Bond price table (10% Interest Payment, 20 Years to Maturity) PV of PV of Yield to Bond Price Principal Coupons Maturity $2,308.11 $672.97 $1,635.14 2% 1,815.42 456.39 1,359.03 4% 1,458.80 1,146.99 311.80 6% 1,317.82 258.42 1,059.40 7% 1,196.36 214.55 8% 981.81 1,091.29 178.43 9% 912.85 1,000.00 148.64 10% 851.36 920.37 124.03 11% 796.33 850.61 746.94 103.67 12% 789.26 702.48 86.78 13% 735.07 72.76 14% 662.31 644.27 51.39 592.88 16% 26.08 513.04 20% 486.96 11.53 406.92 25% 395.39 ++++++ + +++ + + Impact of time to maturity on bond prices Table 10-2 (10% Interest Payment, Various Times to Maturity) Time Period in Bond Price with 8% Bond Price with 12% Yield to Maturity Years to Maturity Yield to Maturity $1,000.00 $1,000.00 1 1,018.52 982.14 1,079.85 927.90 10 887.00 1,134.20 863.78 1,171.19 20 850.61 1,196.36 843.14 25 1,213.50 30 838.90 1,225.16 OF584

Answer 1

a) Referring Table 10-1, if yield to maturity is 9% for 20 years on a bond paying Table 10-1 Bond price table 10% coupons, price of the bond is $1,091.29 (10% Interest Payment, 20 Years to Maturity) PV of Pincipal PV of Coupons Yield to Maturity b) Referring Table 10-2, if yield to maturity is 12% for 5 years on a bond paying 10% ase 30 1.月1542 $927.90 coupons, price of the bond is 436 .aso 03 317 82 1,196.30 214.55 c) #of years held to sell, NPER Annual coupon Payment, PMT Bond's initial purchase price, PV Bond's sale value in 15 years, FV 896 981.81 15 0o00 00 $100 [$1,000 x 10% $1,091.29 [Ref: Part-(a)] 851 36 1196 706.33 4 124.03 789.20 86.78 136 702.48 $927.90 [Ref: Part-(b)] O [Ref: NOTE 61 30 G44 37 513.04 Annual coupon type, TYPE 20% 486.06 25 % 395 Return on investment in 15 years 8.64% [Ref : NOTE maturity on bond prices Impact of time Table 10-2 NOTE: Before-tax component cost of debt RATE(nper,pmt,pv,fv,type) where nper-15; pmt-100; pv-1091.29; fv=-927.90; calculated using EXCEL FUNCTION (10% Interest Payment, Various Times to Maturity) Time Period in Bond Price with 8% Yield to Maturity Bond Price with 12% Years to Maturity Yield to Maturity Here, pmt & fv are negative as they denote cash inflows; Value for pv is positive $1.000.00 1,000.00 as it denotes cash outflow; type-0 as coupon are paid at the end of each year only. 1,018.52 982.14 5 1,079.85 927.90 C A 1 #of years held to sell, NPER 2 Annual coupon Payment, PMT 3 Bond's initial purchase price, PV 4 Bond's sale value in 15 years, FV 5 Annual coupon type, TYPE 6 Return on investment in 15 years 1,134.20 15 = 1000 10 % [$1,000 x 10 % ] 20 850.61 1,196.36 $1,091.29 [Ref: Part-(a)] 25 843.14 1,213.50 $927.90 [Ref: Part-(b)] 30 838.90 1,225.16 o [Ref: NOTE) =RATE(B1,-B2,B3,-B4,B5) [Ref: NOTE