Question

Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 7.95%. If Janet sold the bond today for $1,104.19, 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

Selling Price = 1104.19

Face Value = 1000

Annual coupon amount = 0.1*1000 = 100

Number of payments = 15

YTM = 0.0795

Price of a bond = Present value of all annual coupons and face value discounted at ytm.

Price of bond = 100/(1+0.0795)^1 + 100/(1+0.0795)^2 + 100/(1+0.0795)^3 + 100/(1+0.0795)^4 + 100/(1+0.0795)^5 + ........ 100/(1+0.0795)^15 + 1000/(1+0.0795)^15

Price of bond = Buying Price = 1176.01

Coupon Received = 0.1 * 1000 = 100

Rate of return = ((Selling Price + coupon received - Buying Price )/ Buying Price )* 100

= (( 1104.19 + 100 - 1176.01)/1176.01) *100

= 2.40% Answer