Question

A. Two years ago, you purchased a new10-year bond issued by APPLE with a face value of $1,000 and coupon interest rate of 3%. Given the current crisis, bonds of equal risk and maturity are now 2%, so you decide to sell the bond. Calculate the selling price (4 points).

B. Calculate the Annualized HPR from your investment (2).

Answer 1

Annual Interest payment=3/100*1000

                                                   =30

Price of the bond will be

Annual interest rate/ 1+ Rate at the year of maturity. Here maturity rate is 0.02

Therefore price of the bond after two years

=30/1.02 + (30+1000)/1.02²

                     [As the bond decided to sell after two years]

=30/1.02+1030/1.0404

=29.41+990

=1019.41

So, the current selling price is $1019.41.