Question

You buy a bond from ABC Corporation that has a 12 year, 6% coupon, $1000 pay value for a price of $1000. The bond pays interest semi-annually. One year from now, interest rates have risen by 2%, so that they are now at 8% per year. What rate of return did you earn on this bond?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(6*1000/200)/(1 + 8/200)^k]     +   1000/(1 + 8/200)^11x2

k=1

Bond Price = 855.49

rate of return/HPR = ((Ending price+Coupon amount)/Beginning price-1)

=((855.49+60)/1000-1)

=-8.45%