Question

Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 11.27%. If Janet sold the bond today for $927.53, 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

Coupon = 10% of 1000 = 100

Last year price = Coupon * [1 - 1 / (1 + r)^n]/ r + FV / (1 + r)^n

Last year price = 100 * [1 - 1 / (1 + 0.1127)^25] / 0.1127 + 1000 / (1 + 0.1127)^25

Lat year price = 100 * [1 - 0.06927] / 0.1127 + 69.270416

Lat year price = 100 * 8.25847 + 69.270416

Last year price = 895.117429

Rate of return = [(Ending value + coupon - beginning value) / beginning value] * 100

Rate of return = [(927.53 + 100 - 895.117429) / 895.117429] * 100

Rate of return = 14.79%