Assume you have a client who owns the Oklahoma Instruments bond. You expect that the interest rates decrease .5% over the coming year and you advise to sell the Oklahoma Instruments bond exactly one year from now. What will be the sale price and what is the return on the investment for the coming year?

Find below the complete question:

Oklahoma Instruments has a bond issue outstanding that pays $70 annually. It has a face value of $1,000, and it will mature in eight years. Similar bonds are priced to yield 6.5%. What would you expect this bond to sell for? If you held this bond until it matures what would your investment yield?

Assume you have a client who owns the Oklahoma Instruments bond. You expect that the interest rates decrease .5% over the coming year and you advise to sell the Oklahoma Instruments bond exactly one year from now. What will be the sale price and what is the return on the investment for the coming year?

price now is $1,030.44  

yield now 6.5%

price in a year's time $1,055.82

return on investment is 9.26%

Explanation:

The price of the bond is the present value is computed using the pv formula in excel:=pv(rate,nper,pmt,fv)

rate is the yield of 6.5%

nper is the number of years to maturity of 8 years

pmt is the periodic payment ,which is $70

fv is the face value of $1000

=-pv(6.5%,8,70,1000)

=$1,030.44  

yield to maturity is computed using rate formula in excel:

=rate(nper,pmt-pv,fv)

=rate(8,70,-1030.44,1000)

=6.50%

If yield decrease by 0.5%,the selling price in a year's time is:

pv=(6%,7,70,1000)

PV=$1,055.82  

Then the return on investment=(P1-Po+coupon)/Po

                                                   =($1,055.82-$1,030.44+$70)/$1,030.44  

                                                    =9.26%

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