Question

Last year Janet purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.22%. If Janet sold the bond today for $1,151.5, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The rate of return that she earned for the past year is computed as follows:

= (Selling price - Purchase price + Coupon payment) / Purchase price

Purchase price is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 1,000 x 9% x [ [ (1 - 1 / (1 + 0.1222)¹⁰ ] / 0.1222 ] + $ 1,000 / 1.1222¹⁰

= $ 90 x 5.599700853 + $ 315.7165558

= $ 819.6896325

So, the return will be as follows:

= [ $ 1,151.5 - $ 819.6896325 + $ 90 ] / $ 819.6896325

= $ 421.8103675 / $ 819.6896325

= 51.46%

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