Question
Suppose you purchased a 20-year, $750,000 deep discount bond when it was initially offered. Four years later you sell the bond and market interest rates
Suppose you purchased a 20-year, $750,000 deep discount bond when it was initially offered. Four years later you sell the bond and market interest rates have risen from 6.25% to 8.54%. a. Calculate the initial price of the bond. PV=FV/(1+i) ^n = 750,000 / (1+0.0625) ^20 = $223,091.23 b. Calculate the current price of the bond. PV=FV/(1+i) ^n = 750,000 / (1+0.0854) ^16 = $202,126.93 c. Calculate the annual holding period return on this instrument and compare it to the annual return you were expecting. d. Explain whether your return would have been relatively greater or less if you had purchased a 10-year instrument. Support your conclusion with numerical evidence. Parts C and D only, answers to A and B are included
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started