An 8.5%, twenty-year bond yields 6.5%. If the yield remains unchanged, what will
ID: 2632601 • Letter: A
Question
An 8.5%, twenty-year bond yields 6.5%. If the yield remains unchanged, what will be its price one year hence? Assume annual coupon payments. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price? ______________
What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Round your answer to 1 decimal place.)
Total Return? ___________________
An 8.5%, twenty-year bond yields 6.5%. If the yield remains unchanged, what will be its price one year hence? Assume annual coupon payments. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price? ______________
What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Round your answer to 1 decimal place.)
Total Return? ___________________
Explanation / Answer
PV of the bond now can be calculated in Excel as =PV(6.5%,20,-85,-1000). This is equal to 1220.37
PV of the bond after one year can be calculated in Excel as =PV(6.5%,19,-85,-1000). This is equal to 1214.69
Answer: Price of bond in one year = $ 1214.69
Total return to investor = (price after one year + annual coupon) - price now = (1214.69 + 85) - 1220.37 = $ 79.3
Total return % = 79.3 / 1220.37 = 6.5%
Answer: Total return = $ 79.3 and total return in % = 6.5%
Hope this helped ! Let me know in case of any queries.
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