Question

You are buying from the financially questionable ABC Capital Corp. Their 8.5% coupon bond matures in...

You are buying from the financially questionable ABC Capital Corp. Their 8.5% coupon bond matures in 8 years. You bought the bond earlier today, when it yielded 28% APR. How much did you pay for the bond? After holding the bond one year, you need to sell it. ABC Capital has returned to a more solid financial footing so that the interest rates have fallen to 14% APR, at what price will you sell the bond? What return did you realize on this one-year investment?

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Answer #1

Price of Bond = PV of future cashflows from it.

Price after 1 year:

Realized Ret = [ [ (P1 - P0)+D1 ] / P0 ]

= [ [ (764.14 - 400.22) + 85 ] / 400.22 ]

= [ [ 363.92 + 85 ] / 400.22 ]

= [ 448.92 / 400.22 ]

= 1.1217 I.E 112.17%

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