70.2K

Verified Solution

Link Copied!

Suppose that you are considering investing in a $4-$year bond that has a face value of $$1,000$ and a coupon rate of $5\mathrm{.}7\%.$

a$.)$ If the market interest rate on similar bonds is $5\mathrm{.}7\%,$ the price of the bond is $$1000.($Round your response to the nearest cent.$)$

The bond's current yield is

$\%.($Round your rosponso to two docimal places I don' $t$ care about the top part I only want the answer for the last problem

b$.)$ Suppose that you purchase the bond, and the next day the market interest rate on similar bonds falls to $4\mathrm{.}7\%.$

The price of the bond will be $s$

$($Round your response to the nearest cent.$)$

The current yield will be $5\mathrm{.}50\%.($Round your responso to two decimal places.$)$

c$.)$ Now suppose that $1$ year has gone by since you bought the bond, and you have received the first coupon payment. The market interest rate on similar bonds is still $4\mathrm{.}7\%.$

At an interest rate of $4\mathrm{.}7\%,$ the price an investor is willing to pay for the bond is $

$($Round your response to the nearest cent$)$

Your rate of return on the bond was $8\mathrm{.}44\%.($Round your response to two decimal places.$)$

Suppose investor A bought the bond a year ago for the amount that was calculated in part $($b$).$ Investor A$\text{'}$s rate of return would have been $4\mathrm{.}70\%.($Round your response to iwo decimal places.$)$

d$.)$ Now suppose that $2$ years have gone by since you bought the bond and that you have received the first two coupon payments. At this point, the market interest rate on similar bonds unexpectedly

rises to $9\%.$

At an interest rate of $9\%,$ the price an investor is willing to pay for the bond is $$941\mathrm{.}95.($Round your response to the nearest cent.$)$

The current yield for your investment is $6\mathrm{.}05\%.($Round your response to two decimal places.$)$

Suppose Investor B bought the bond at the price you calculated in $($c$).$ Investor B$\text{'}$s rate of retum would have been

K$.($Round your response to two decimal places.$)$

Answer & Explanation Solved by verified expert

See Answer