Question

1. Exxon 20-year bonds pay 9% coupon annually on a $1,000 par value. If the bond sells for $800, what is the bonds expected rate of return?

***Please use financial calculator and write down steps to get answer***

Answer 1

As coupon is 9% on $1000 face value, the annual coupon paid is .09*1000 = $90.

So, periodic payment, PMT is $90

Face value of $1000 will be received at the end of 20 years. So FV, future valie is $1000.

Price is the present value, PV which is -$800.

Negative sign is used as it is cash outflow.

Time period, N is 20 years.

1. After clearing existing values by clearing TVM (2nd FV) enter 20 then press N. This stores time period as 20 years.

2. Enter 800 then press +|- to enter negative sign and then press PV to store value.

3. Enter 1000 then press FV.

4. Enter 90 then press PMT.

5. Press CPT to compute value. Then press I/Y to get interest rate as 11.61286%.

Thus, the answer is that bonds expected rate of return is 11.61%.

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