Question 13 (14 points)
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Question 13 options:
Round all answers out to two decimal places, i.e. $______.___ or ______.___%.
Suppose you buy a 20 year $25,000 face value bond today that has annual coupon payments with a coupon rate of 6%.
What price would you pay for it if you expect a 6% yield to maturity?
Now suppose it is a year later and you need some cash, so decide to sell your bond. Unfortunately, interest rates have risen and the purchaser, Bob, expects a 7.5% yield to maturity.
What price is Bob willing to pay you for the bond to achieve his desired yield to maturity?
What is your total return from the bond (as a %)?
Now suppose Bob also holds the bond for only a year and decides to sell. Kate buys the bond from him, but expects only a 3.5% yield to maturity, as interest rates have fallen substantially since Bob bought the bond.
What price will Kate pay Bob for the bond in order to achieve her desired yield to maturity?
What was Bob's total return for the year that he held the bond (as a %)?
Kate holds the bond for 18 years and receives the face value when it matures, as well as all coupon payments along the way.
What (annualized) rate of return did Kate earn on the bond (as a %)?