1. You purchase a 20-year, $1,000 bond with a coupon rate of 6 percent paid annually with a margin requirement of 40 percent. a. What would be your rate of return if the interest rates decreased, immediately after purchase, to 4 percent? b. What would be your rate of return if the interest rates increased, immediately after purchase, to 8 percent?
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Answer:
a)
Margin amount = 1000 * 40% = 400
Rate = 4%
Nper = 20
PMT = 1000 * 6% = 60
FV = 1000
Price of the bond can be calculated by using the following excel
formula:
=PV(rate,nper,pmt,fv)
=PV(4%,20,-60,-1000)
= $1,271.81
Rate of return = (Bond Price - Face Value)/Margin amount
= ($1,271.81 - $1,000) / $400
= $271.81 / $400
=
67.95%
b)
Margin amount = 1000 * 40% = 400
Rate = 8%
Nper = 20
PMT = 1000 * 6% = 60
FV = 1000
Price of the bond can be calculated by using the following excel
formula:
=PV(rate,nper,pmt,fv)
=PV(8%,20,-60,-1000)
= $803.64
Rate of return = (Bond Price - Face Value)/Margin amount
= ($803.64 - $1,000) / $400
= -$196.36 / $400
= -49.09%
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