Question
Seven years ago you bought a $750,000, 20-year, deep discount bond with a market interest rate of 5.25%. Since then market rates have gone to
Seven years ago you bought a $750,000, 20-year, deep discount bond with a market interest rate of 5.25%. Since
then market rates have gone to 5.75% and you find that you must sell the bond.
a. Determine the current and initial price of the bond.
b. Calculate the annual rate of return on this instrument for the period you held it and compare it to the annual rate
of return you were expecting.
c. Explain whether your return would have been relatively greater or less if you held originally purchased a 30-year
instrument. Support your conclusion with the appropriate work.
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