USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25-year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25-year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.

-Refer to Exhibit 13.7. The dollar investment in the candidate bond is
A) $780.34.
B) $1483.25.
C) $1361.54.
D) $1413.95.
E) $1000.00.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25-year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25-year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
 
-Refer to Exhibit 13.7. The dollar investment in the candidate bond is
A) $780.34. 
B) $1483.25. 
C) $1361.54. 
D) $1413.95. 
E) $1000.00.

Quizplus · Accepted Answer

The dollar investment in the candidate bond is $780.34. This is calculated by multiplying the face value of the bond by the purchase price. The face value of the bond is $1,000 and the purchase price is 78.034%.