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b. Assuming that comparable bonds are paying 8 percent, what is the
approximate dollar price for which you could sell your bond?
c. In your own words, explain why your bond increased or decreased
in value.
The value of my bond increased because people would want to buy my
bond at $1000 because the same bond at 8% would cost more. My
bond had a fixed interest rate of 9.5 percent during a time period when
interest rates in the economy were declining.
5. Using Margin. Bill Campbell invested $4,000 and borrowed $4,000
to purchase shares in Wal-Mart. At the time of investment, Wal-Mart
was selling for $45 a share.
a. If Bill paid $30 commission, how many shares could Bill buy if he
used only his own money and did not use margin?
b. If Bill paid $50 commission, how many shares could Bill buy if he
used his $4,000 and borrowed $4,000 on margin to buy Wal-Mart
stock?
b. Assuming that Bill did use margin, paid $90 commission to sell his
stock, and sold his Wal-Mart stock for $53, how much profit did he
make on his Wal-Mart investment?
6. Calculating yields. Assume you purchased a corporate bond at its
current market price of $850 on January 2, 2002. It pays 9 percent
interest and it will mature on December 31, 2011, at which time the
corporation will pay you the face value of $1,000.
a. Determine the current yield on your bond investment at the time of
purchase.
b. Determine the yield to maturity on your bond investment.