A $1,000 par value bond was issued 15 years ago at a 14 percent coupon rate, paid
Question:
A $1,000 par value bond was issued 15 years ago at a 14 percent coupon rate, paid semiannually. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 8 percent.
a. What is the current price of the bond?
b. Assume Igor Sharp bought the bond three years ago, when it had a price of $1,025. What is his dollar profit based on the bond's current price?
c. Further assume Igor Sharp paid 20 percent of the purchase price in cash and borrowed the rest (known as buying on margin). Igor used the interest payments from the bond to cover the interest costs on the loan. How much of the purchase price of $1,025 did Igor Sharp pay in cash?
d. What is Igor's percentage return on his cash investment? Divide the answer to part b by the answer to part c.
e. Explain why his return is so high.
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,...
Step by Step Answer:
a The original bond was issued at 14 Yield to maturity is now 8 10 years ...View the full answer
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
