Problem:
Go to table illustrated below 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 percent?
b. What is the bond price at 8 percent?
c. What would be your percentage return on investment if you bought when rates were 11 percent and sold when rates were 8 percent?
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(10% Interest Payment, 20 Years to Maturity)
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Yield to Maturity
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Bond Price
|
|
2%
|
$2,308.10
|
|
4
|
1,815.00
|
|
6
|
1,459.00
|
|
7
|
1,317.40
|
|
8
|
1,196.80
|
|
9
|
1,090.90
|
|
10
|
1,000.00
|
|
11
|
920.30
|
|
12
|
850.90
|
|
13
|
789.50
|
|
14
|
735.30
|
|
16
|
643.90
|
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20
|
513.00
|
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25%
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$ 407.40
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