Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Face Value Coupon Rate Maturity Years to maturity Rate of return Future Value Payment Present Value $48,000,000 4.5% 1997 5 10% $1,000 $45 $791.51 $32,000,000

Face Value

Coupon Rate

Maturity

Years to maturity

Rate of return

Future Value

Payment

Present Value

$48,000,000

4.5%

1997

5

10%

$1,000

$45

$791.51

$32,000,000

8.25%

2007

15

10%

$1,000

$82.50

$866.89

$100,000,000

12.625%

2017

25

10%

$1,000

$126.25

$$1238.27

Assume that you plan to keep your money invested, and to reinvest all interest receipts, for five years. Assume further that you bought the 5-year bond for $800, and interest rates suddenly fell to 5 percent and remained at that level for five years. Set up a worksheet that could be used to calculate the actual realized rate of return on the bond, but do not (necessarily) complete the calculations. Note that each interest receipt must be compounded to the terminal date and summed, along with the maturity value. Then, the rate of return that equates this terminal value to the initial value of the bond is the bonds realized return. Assume that the answer is 9.16 percent. How does that value compare with your expected rate of return? What would have happed if interest rates had risen to 15 percent rather than fallen to 5 percent? How would the results have differed if you had bought the 25-year bond rather than the 5-year bond? Do these results suggest that you would be better off or worse off if you buy long-term bonds and then rates change? Explain.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Applications And Theory

Authors: Marcia Cornett, Troy Adair, John Nofsinger

2nd Edition

0073530670, 9780073530673

More Books

Students also viewed these Finance questions