Question

. Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 13.08%. If Janet sold the bond today for $1,051.15, 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

Given Information

FV | $1000 |

INTEREST | $100 ( 10% OF 1000) |

YTM RATE | 13.08% |

YTM | 20 Years |

COMPOUNDING | Annually |

**Rate of return = Current
yield + Capital Gain Yield**

**= Annual interest / bond
price + Current price / Price of the bond last
year**

**Price of the bond = int [ 1
- ( 1 + r / 100) ^{-n} ] / r + FV / ( 1 + r /100)
^{n}**

**= 100 [ 1 - ( 1 + .1308)
^{-20}] / 0.1308 + 1000 / ( 1 +
0.1308)^{20}**

**= 100 [ 1 - 0.0855] /
0.1308 + 1000 / 11.68**

**= 699.15 +
85.6**

**= $
784.75**

**Current yield = Annual
interest / bond price**

**= 100 /
784.75**

**=
12.74%**

**Capital Gain Yield =
Current price / Price of the bond last year - 1**

**= 1051.15 / 784.75 -
1 **

**= 1.339 -
1**

**= 0.339
%**

**Total Return = 12.74% +
0.339%**

**=
13.08%**

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