Do the following problem. Show all set up and work for full credit. All interest rate problems must be carried at least 5 decimal places and left in % form. Formulas from class must be utilized and financial calculator answers will not be accepted.
Suppose you purchased a 20-year, $750,000 deep discount bond when it was initially offered. Four years later you sell the bond and market interest rates have risen from 6.25% to 8.54%.
a. Calculate the initial price of the bond.
b. Calculate the current price of the bond.
c. Calculate the annual holding period return on this instrument and compare it to the annual return you were expecting.
d. Explain whether your return would have been relatively greater or less if you had purchased a 10-year instrument. Support your conclusion with numerical evidence.