Refer to Table 10-1. which is based on bonds paying 10 percent interest for 20 y
ID: 2761368 • Letter: R
Question
Refer to Table 10-1. which is based on bonds paying 10 percent interest for 20 years Assume interest rates in the maricet (yield to maturity) increase from 8 to 12 percent What is the bond price at 8 percent'? What is the bond price at 12 percent'? What would be your percentage return on the investment if you bought when rates were 8 percent and sold when rates were 12 percent'? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Enter the value as a positive amount.)Explanation / Answer
Assume par value of bond be "$ 1000"
Interest = 1000*.10 = 100
A)Bond price = (PVAF@8%,20* Interest ) +(PVF@8%,20 *Par value)
= (9.81815 * 100) + (.21455 * 1000)
= 981.81+ 214.55
= $ 1196.36
B)Bond price = (PVAF@12% , 20*Interest ) +(PVF@12%,20 *Par value)
=(7.46944 * 100) + (.10367 *1000)
= 746.94+ 103.67
= 850.61
c)Rate on investment (If 8%) = Total return = 1000 -1196.36 = -196.36
% return = 196.36 /1196.36 = 16.41% loss
If 12% : 1000-850.61 = 149.39
% return = 149.39 / 850.61 = 17.56% profit