a.
To calculate: The current price of the bond of Ms. Bright.
Introduction:
Bond:
It is a long-term loan borrowed by corporations, organizations, or the government for the
purpose of raising capital. It is issued at fixed interest depending upon the reputation of the
corporation and also termed as fixed-income security.
b.
To calculate: The dollar profit on the basis of bond's current price with an assumption that the bond was bought three years ago at a price of $1,050.
Introduction:
Bond:
It is a long term loan borrowed by corporations, organizations, or the government for the
purpose of raising capital. It is issued at fixed interest depending upon the reputation of the
corporation and also termed as fixed-income security.
c.
To calculate: The amount of purchase price of $1,050 that Ms. Bright paid in cash.
Introduction:
Bond:
It is a long-term loan borrowed by corporations, organizations, or the government for the
purpose of raising capital. It is issued at fixed interest depending upon the reputation of the
corporation and also termed as fixed-income security.
d.
To calculate: The percentage return on the cash investment by Ms. Bright.
Introduction:
A rate that shows the net profit or loss, an investor earns or loses on the investment over a particular time period is termed as the rate of return.
e.
To explain: The reason for the higher returns of Ms. Bright.
Introduction:
Bond:
It is a long-term loan borrowed by corporations, organizations, or the government for the
purpose of raising capital. It is issued at fixed interest depending upon the reputation of the
corporation and also termed as fixed-income security.
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EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
- A.) You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond. B.) Refer again to the bond information in Problem 1. You expect to hold the bond for three more years, then sell it for $990. If the bond is expected to continue paying $75 per year over the next three years, what is the expected rate of return on the bond during this period?arrow_forwardAssume that three years ago, you purchased a corporate bond that pays 6.50 percent. The face value of the bond was $1,000. Also assume that three years after your bond investment, comparable bonds are paying 7.00 percent. (a) What is the annual dollar amount of interest that you receive from your bond investment? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Annual interest (b) Assuming that comparable bonds are paying 7.00 percent, what is the approximate dollar price for which you could sell your bond? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Approximate bond pricearrow_forwardThe Florida Investment Funds buys 58 bonds of the Gator Corp. through a broker. The bond pays 10 percent annual interest. The Yield to Maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity. Calculate your final answer using the formula and financial calculator methods. Using an assumption of semiannual interest payments: a) Compute the price of a bond (Do not round intermediate calculations and round your answer 2 decimal places. b) Compute the total value of 58 bonds (Do not round intermediate calculations and round your answer 2 decimal places).arrow_forward
- Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 18 years. Assume you purchase a bond that costs $100. a. What is the exact rate of return you would earn if you held the bond for 18 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $100 in 2020 at the then current interest rate of .22 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2038. What annual rate of return will you earn over the last 10 years?arrow_forward1. You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the real ized rate of return earned on this bond. 2. Refer again to the bond information in Problem 1. You expect to hold the bond for three more years, then sell it for $990. If the bond is expected to continue paying $75 per year over the next three years, what is the expected rate of return on the bond during this period? (LG 3-1)arrow_forwardA $1,000 par value bond was issued 25 years ago at a 9.00 percent coupon rate, paid semiannually. It currently has 20 years remaining to maturity. Interest rates on similar debt obligations are now 6 percent. (Use a Financial calculator to arrive at the answers.) a. What is the current price of the bond? (Round the final answer to 2 decimal places.) 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? (Round the final answer to 2 decimal places.) Dollar profit 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? Purchase price d. What is Igor's percentage return on his cash investment? Divide the answer to part b by the answer to part c. (Do not…arrow_forward
- 3. Assume you purchased a bond for $9,186. The bond pays $300 interest every six months. You sell the bond after 18 months for $10,000. Calculate the following: a. Income. b. Capital gain (or loss). c. Total return in dollars and as a percentage of the original investment. Review Only Click the icon to see the Worked Solution. a. The current income is $ (Round to the nearest dollar.) b. The capital gain (or loss) is $ (Enter a loss as a negative number and round to the nearest dollar.) c. The total return in dollars is $ (Round to the nearest dollar.) The total return as a percentage of the original investment is %. (Enter as a percentage and round to two decimal places.)arrow_forwardHarold Reese must choose between two bonds: Bond X pays $85 annual interest and has a market value of $780. It has 12 years to maturity.Bond Z pays $95 annual interest and has a market value of $800. It has five years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) b. Which bond should he select based on your answers to part a? multiple choice 1 Bond Z Bond X c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 11.90 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a…arrow_forwardAssume that you have two bond investments and the information follows: Bond A has a par value of $8,000, interest paid semi annual, maturity 2 years, stated interest rate is 6%. Bond B has a par value of $8,000, interest paid semi annual, maturity 10 years, stated interest rate is 6%. The interest rates are increasing to 7%. Assume that you can only sell one of the bonds, which bond will you sell before the interest rate changes to 7%? Explain and support your answer with a present value calculation.arrow_forward
- Harold Reese must choose between two bonds: Bond X pays $92 annual interest and has a market value of $895. It has 10 years to maturity. Bond Z pays $82 annual interest and has a market value of $920. It has four years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Bond X Bond Z Bond X O Bond Z Current Yield b. Which bond should he select based on your answers to part a? % % c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 10.94 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent…arrow_forwardSuppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 22 years. Assume you purchase a bond that costs $50. a. What is the exact rate of return you would earn if you held the bond for 22 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $50 in 2017 at the then current interest rate of .24 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2039. What annual rate of return will you earn over the last 11 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardYou have discovered that when the required rate of return on a bond you own fell by 0.5 percent from 9.6 percent to 9.1 percent, the fair present value rose from $940 to $965. The bond pays interest annually. What is the duration of this bond? Assume annual payments. (Do not round intermediate calculations. Round your answer to 1 decimal place. (e.g., 32.1)) Duration of this bond 5.7 X yearsarrow_forward
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