A bond issued by Zephyr Balloons currently has a market price equal to $1,080. The bond pays
Question:
a. If you buy the bond and its price does not change during the year, what is the total dollar return that you would earn if you sell the bond at the end of the year?
b. If the price of the bond increases to $1,100 during the year, what is the total dollar return that you would earn if you sell the bond at the end of the year? Compute the yield for the year.
c. If the price of the bond decreases to $1,000 during the year, what is the total return that you would earn if you sell the bond at the end of the year?
Step by Step Answer:
a Dollar return 120 Yield 1201080 0...View the full answer
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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