Question

A coupon bond of 7.6 percent with 10 years left to maturity is priced to offer a 6.30 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.2 percent.

What would be the total return of the bond in dollars?

what would be the total return of the bond in percentage?

Answer 1

Current Price of bond for 10 year left in maturity is calculated in excel and screen shot provided below:

Current Price of bond is $1,095.38.

After one year, year remains in maturity is 9 year. So price of bond next year is calculated in excel and screen shot provided below:

Price of bond after 1 year is $1,026.60.

a.

Dollar return = ($1,026.60 + $76 - $1,095.38)

= $7.22.

Dollar return is $7.22.

b.

Percentage return = $7.22 / $1,095.38

= 0.66%

Percentage return is 0.66%.