A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest

Question

21 users unlocked this solution today!

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,030. Further assume Ms. Bright paid 40 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan. a. What is the current price of the bond? Use Toble 16-2. (Input your answer to 2 decimal places.) Price of the bond b. What is her dollar profit based on the bond's current price? (Do not round intermediate calculations and round your answer to 2 decimal places.) Dollar profit c. How much of the purchase price of $1,030 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.) Purchase price paid in cash d. What is Ms. Bright's percentage return on her cash investment? Divide the answer to part b by the answer to part C. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Percentage return % B C E F G N Table 16-2 Interest rates and bond prices (face value is $1,000 and annual coupon rate is 12%) A D H Rate in the Market (%)Annual Yield to Maturity Years to Maturity 8% 10% 12% 14% 16% 1 $1,037.72 $1,018.59 $1,000.00 $981.92 $964.33 15 $1,345.84 $1,153.72 $1,000.00 $875.01 $774.84 $1,429.64 $1,182.56 $1,000.00 $861.99 $755.33 =+PV(F2/2,A5*2,-120/2, -1000) 7 + PV(rate,nper,pmt [fv]) 3 4 25 6