## Question

###### A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate....

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,050. Further assume Ms. Bright paid 30 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 Table 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

Interest rates and bond prices (face value Is $1,000 and annual coupon rate Is 12%) Table 16-2 в Н Rate in the Market (%)–Annual Yield to Maturity* 2 Years to Maturity 14% 10% 12% 16% $1,037.72 $1,018.59 $1,000.00 $981.92 $964.33 $1,345.84 $1,153.72 $1,429.64 $1,182.56 $1,000.00 $875.01 $774.84 $1,000.00 $861.99 $755.33 15 25 |=+PV(F2/2,A5*2,-120/2, – 1000) +PV(rate,nper,pmt[fv]) 1, 4) 6.

## Answers

a) Present value of interest payments Amount of interest 1000*12% 120 P.v value @ 8% for 15 years 8.559 Present value 120*8.559 1027.08 Present value of principal value at maturity Principal value 1000 Pv value of 8% at 15th year 0.315 Present value 1000*0.315 315 Current price of bond = 1027.08+315 1342.08 b) Purchase value = 1050 Current price of bond = 1342.08 Her profit = 1342.08-1050 292.08

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