Question

a. The twenty-year bond yields 6.5% and has a coupon of 8.5%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price $ b. What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Total return %

Answer 1

Current Price of bond is calculated in excel and screen shot provided below:

Current Price of bond is $1,220.37.

After 1 year, year remains in maturity of bond will be 1 year. So price of bond after 1 year is calculated in excel and screen shot provided below:

Price of bond after one year will be $1,214.69.

b.

Total return = (Price after one year + Coupon Received - Price now) / Price now

= ($1,214.69 + $85 - $1,220.37) / $1,220.37

= $79.32 / $1,220.37

= 6.50%

Total return in one year is 6.50%.