Question

Consider the following $1,000 bond that has a 4% nominal annual interest, rate paid semiannually. The bond matures in 20 years. The bond is offered at $900 each. What nominal rate of return would you receive if you purchased the bond now and held it to maturity? Please solve using excel if possible.

Answer 1

Semi-annual bond coupon (PMT) ($) = 1,000 x (4%/2) = 20

Semi-annual coupon periods (NPER) = 20 x 2 = 40

Bond price (PV) ($) = - 900

Bond face value (FV) ($) = 1,000

Nominal semi-annual rate of return (ROR) is computed uing Excel RATE function. The Nominal Annual rate of return is found by multiplying Nominal semi-annual rate of return by 2.

Bond Price (PV) ($) =	-900
Semi-annual bond coupon (PMT) ($) =	20
Semi-annual coupon periods (NPER) =	40
Bond face value (FV) ($) =	1000
Nominal semi-annual rate of return (ROR) =	2.39%
Nominal annual rate of return (ROR) =	4.78%