Question

Suppose that you bought a four year coupon bond with $10,000
face value, 6% coupon rate and 7% yield to maturity. After holding
it for a year and collecting the first coupon payment you decide to
sell it. Calculate the return (in %) on this investment if the
interest rate has just

dropped to 5%.

With Formula's Please

Answer #1

purchase price of the bond

=(10000*coupon rate)*((1-(1+r)^(-n))/r)+10000/(1+r)^n

=(10000*6%)*((1-(1+7%)^(-4))/7%)+10000/(1+7%)^4

=9661.2789

selling price of bond after a year

=(10000*coupon rate)*((1-(1+r)^(-n))/r)+10000/(1+r)^n

=(10000*6%)*((1-(1+5%)^(-3))/5%)+10000/(1+5%)^3

=10272.3248

the return (in %) on this investment

=((coupon income)+(capital gain))/purchase price of the bond

=((10000*6%)+(10272.3248-9661.2789))/9661.2789

=12.54%

the above is answer..

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