Question

You purchased a bond for $925 The bond has a coupon rate of 8 ​percent, which is paid semiannually. It matures in 14 years and has a par value of 1000 . What is your expected rate of​ return? Your expected rate of return is ?

Answer 1

Expected Rate of Return = Yield to Maturity = [Coupon + Pro-rated Discount]/[(Purchase Price + Redemption Price)/2]

Where,

Coupon = Par Value*Coupon Rate = 1000*8%/2 = 40

Pro Rated Discount = [(Redemption Price-Purchase Price)/Period to Maturity] = [(1000-925)/(14*2)] = 2.67857

Redemption Price (assuming at par) = 1000

Therefore, YTM = [40+2.67857]/[(925+1000))/2] = 42.67857/962.5= 0.04434= 4.434%

Above YTM is Half Yearly. Therefore, Annual YTM = Half Yearly*2 = 4.434%*2 = 8.868%