You are considering purchasing a consol that promises annual payments of $4. a.

Question

You are considering purchasing a consol that promises annual payments of $4.

a. If the current interest rate is 2.5 percent, what is the price of the consol?

Instructions: Round your answer to the nearest penny (2 decimal places).

The price of the consol is $

b. You are concerned that the interest rate may rise to 4 percent. Compute the percentage change in the price of the consol and the percentage change in the interest rate. Compare them.

Instructions: Round your answer for dollar amounts to the nearest penny (2 decimal places ) and answers for percentages to the nearest tenth (1 decimal place).

The new price of the consol would be $

The price of the consol falls by % and the interest rises by %.

c. Your investment horizon is one year. You purchase the consol when the interest rate is 5 percent and sell it a year later, following a rise in the interest rate to 6 percent. What is your holding period return?

Instructions: Round your answer to the nearest tenth (1 decimal place).

Your holding period return is %

Explanation / Answer

a) Price = $ 4/ 0.025 = $ 160

b) New Price = $ 4/ 0.04 = $ 100

Percentage change in price = 60/100 X 100 = 60%

Percentage change in interest rate = (4 - 2.5)/ 2.5 X 100 = 60%

When interest rate increases by 60% then, price decreases by 60%.

c) $4/160 + (100 - 160)/160 = 1/40 - 60/160 = - 20/160 = - 1/8 = - 0.125%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.