Question

A coupon bond of 9.4 percent with 18 years left to maturity is priced to offer a 7.20 percent yield to maturity. You believe that in one year, the yield to maturity will be 8.0 percent.

What would be the total return of the bond in dollars? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

What would be the total return of the bond in percentage? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

We use a financial calculator to compute the solutions.
We need to estimate the bond price today and in one year to determine the answers.

Assumption: Bond pays coupons semi-annually.

Computing the current bond price:
N=18 x 2 = 36, I=7.2/2 = 3.6%, PMT=1000 x 0,094/2 = 47, FV=1000: CPT PV = -1220.02

Now computing the price in one year:
N=17 x 2 = 34, I=8/2 = 4%, PMT=1000 x 0,094/2 = 47, FV=1000: CPT PV = -1128.88

Total Return in Dollars = The dollar change in price + interest payments = $1128.88 ? $1220.02 + $94 = $2.86

% Return = 2.86/1220.02 = 0.23%