A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It
Question:
a. What is the current price of the bond?
b. Assume Ms. Bright bought the bond three years ago when it had a price of $1,050. What is her dollar profit based on the bond’s current price?
c. Further assume Ms. Bright paid 30 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan. How much of the purchase price of $1,050 did Ms. Bright pay in cash?
d. What is Ms. Bright’s percentage return on her cash investment? Divide the answer to part b by the answer to part c.
e. Explain why her return is so high.
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
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Ms Bright a The original bond was is sued at 12 percent Yield to maturity ...View the full answer
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Related Book For 
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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