Business: Suppose in 2017 you buy two year $1,000 face-value 2% coupon bond for $1,000. In 2018, interest rates increase to 5%. If you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you?

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Suppose in 2017 you buy two year $1,000 face-value

Ответ:

jjjjj23407

19.01.2022

Business

The bonds will be sold at $971.09

while the return on vestment after a year will be of: -0,00891

Explanation:

The bonds will be sold at the discounted price of the future cash flow.

$C \times \frac{1-(1+r)^{-time} }{rate} = PV\\$

C10.000 (1,000 x 2% / 2 payment per year)

time2 (after a year 1 year is left and 2 payment per year)

rate0.025 market rate is 5% annual

$10 \times \frac{1-(1+0.025)^{-2} }{0.025} = PV\\$

PV$19.2742

$\frac{Maturity}{(1 + rate)^{time} } = PV$

Maturity 1,000.00

time 2.00

rate 0.025

$\frac{1000}{(1 + 0.025)^{2} } = PV$

PV 951.81

PV c$19.2742

PV m $951.8144

Total$971.0886

Return on investment:

coupon payment + sale proceeds over purchase price

(971.09 + 20)/1000 - 1 = -0,00891 = -0.891%

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Suppose in 2017 you buy two year $1,000 face-value 2% coupon bond for $1,000. In 2018, interest rates increase to 5%. If you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you?

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