An 8-year government bond makes annual coupon payments of 5% and offers a yield of 7% annually compounded. suppose that the bond yields 2% at the end of the year. what returns did the bondholder earn in this case?
Value of Bond =
Where r is the discounting rate of a compounding period i.e. 7%
And n is the no of Compounding periods 8
Value of Bond at year end =
Where r is the discounting rate of a compounding period i.e. 2%
And n is the no of Compounding periods 7
Return = Coupon+ Capital Gain
= 50 + (1194.16 - 880.74)
% Return = 363.42 / 880.74
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