A $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,005. 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.
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| a. |
| Price of the bond | $ |
| b. |
What is her dollar profit based on the bond’s current price? (Do not round intermediate calculations and round your answer to 2 decimal places.)
|
| Dollar profit | $ |
| c. |
How much of the purchase price of $1,005 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)
|
| Purchase price paid 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. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
|
| Percentage return | % |
Explanation:
a.
| The original bond was issued at 12 percent. |
| Yield to maturity is now 8 percent. |
| 25 years remain to maturity. |
| The bond price is $1,429.92. |
b.
| Dollar profit | = | $1,429.92 – 1,005 |
| = | $424.92 |
c.
| Purchase price paid in cash | = | .30 × $1,005 |
| = | $302.00 |
d.
| Percentage profit | = Dollar profit / Purchase price paid in cash |
| = $424.92 / $302.00 | |
| = 1.4070, or 140.70% |
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