Go to Table 10-1 which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent:
A. What is the bond price at 11%?
B. What is the bond price at 8%?
C. What would be your percentage return on investment if you bought when rates were 11% and sold when rates were 8%?
Table 10-1 Bond price table
(10% Interest Payment, 20Yrs to Maturity)
Yield to Maturity Bond Price
2% $2,308.10
4 1,815.00
6 1,459.00
7 1,317.40
8 1,196.80
9 1,090.90
10 1,000.00
11 920.30
12 850.90
13 789.50
14 735.30
16 643.90
20 513.00
25% $ 407.40
A. To find the bond price at 11%, we look at the table and find the corresponding value. At 11% interest rate, the bond price is $920.30.
B. Similarly, to find the bond price at 8%, we look at the table and find the corresponding value. At 8% interest rate, the bond price is $1,196.80.
C. To calculate the percentage return on investment, we need to find the difference between the initial investment (at 11% interest rate) and the final investment (at 8% interest rate), and then divide it by the initial investment.
Initial investment at 11% interest rate: $920.30
Final investment at 8% interest rate: $1,196.80
Difference: $1,196.80 - $920.30 = $276.50
Percentage return on investment: ($276.50 / $920.30) x 100 = 30.0%
So, if you bought the bond when rates were 11% and sold when rates were 8%, your percentage return on investment would be 30.0%.
To find the bond price at 11%, we need to locate the corresponding value in Table 10-1. According to the table, at a yield to maturity of 11%, the bond price is $920.30.
To find the bond price at 8%, we also look at the table. At a yield to maturity of 8%, the bond price is $1,196.80.
To calculate the percentage return on investment, we need to compare the bond price at 11% (buying price) with the bond price at 8% (selling price). The formula to calculate the percentage return on investment is:
Percentage Return = (Selling Price - Buying Price) / Buying Price * 100
Substituting the values, we have:
Percentage Return = ($1,196.80 - $920.30) / $920.30 * 100
Percentage Return = $276.50 / $920.30 * 100
Percentage Return = 0.3 * 100
Percentage Return = 30%
Therefore, the percentage return on investment would be 30% if you bought the bond when rates were 11% and sold when rates were 8%.