Question

A coupon bond of 7.6 percent with 10 years left to maturity is priced to offer a 6.30 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.2 percent.

What would be the total return of the bond in dollars?

what would be the total return of the bond in percentage?

Answer 1

Assuming face value to be $1,000

Coupon = 0.076 * 1000 = 76

Current price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Current price = 76 * [1 - 1 / (1 + 0.063)¹⁰] / 0.063 + 1000 / (1 + 0.063)¹⁰

Current price = 76 * 7.256597 + 542.834391

Current price = 1,094.3358

Price in 1 year = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price in 1 year = 76 * [1 - 1 / (1 + 0.072)⁹] / 0.072 + 1000 / (1 + 0.072)⁹

Price in 1 year = 76 * 6.460161 + 534.868389

Price in 1 year = 1,025.8406

1)

total return of the bond in dollars = 1,025.8406 + 76 - 1,094.3358

total return of the bond in dollars = 7.50

2)

total return of the bond in percentage = (7.5 / 1,094.3358) * 100

total return of the bond in percentage = 0.69%

answered by: anonymous