A bond has a face value of $900, is redeemable in nine years, and pays interest of $90 at the end of each of the nine years. If the bond can be purchased for $913,what is the rate of return if the bond is held until maturity?
| Present Value = Future value/ ((1+r)^t) | |||||||||
| where r is the rate of return and t is the time period | |||||||||
| We set up the cash flow and using excel find the rate of return | |||||||||
| for which the price of the bond is 913 | |||||||||
| the price of the bond is the present value of future payments | |||||||||
| rate of return | 0.0975 | ||||||||
| year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| future payment | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 990 |
| present value | 82 | 75 | 68 | 62 | 57 | 52 | 47 | 43 | 429 |
| price | 913 | ||||||||
| The rate of return if the bond is held until maturity is equal to 9.75% | |||||||||
Get Answers For Free
Most questions answered within 1 hours.