The 7.9%, ten-year bond yields 5.9%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $1,000. What is the total return to an investor who held the bond over this year?
A government bond matures in 4 years, makes annual coupon payments of 5.9% and offers a yield of 3.9% annually compounded. Assume face value is $1,000.
a) Suppose that one year later the bond still yields 3.9%. What return has the bondholder earned over the 12-month period?
b) Now suppose that the bond yields 2.9% at the end of the year. What return did the bondholder earn in this case?
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Coupon payment = $1000*7.9/100 =$79
Principle amount assume has 1000$
Given yield or interest rate is =5.9%
[email protected] in year 1 = 1/1.059 =0.9443 approximately.
Coupon payment pv value is = 79*0.9443 =74.5997
Principle amount pv value is = 1000*0.9443 =944.3
Total amount is =1018.9$ ~
Return on bond over this year is:
1018.9 -1000 =18.9$,. 18.9/1000 =1.89% return.
2 nd question is
Coupon payment is = 1000*5.9/100 = 59$
Principle amount is = 1000$
[email protected]% in year 1 is = 1/1.039=0.9625
Bond price at year end is = 59*0.9625+1000*0.9625
Value of bond is = 56.79+962.5
=1019.3$ approximately.
Return on bond is =1019.3 - 1000/1000
= 19.3/1000
= 1.93% return.
b) question given yield is 2.9%
Coupon payment is 59$ and principle amount 1000
Pv of bond @2.9% is = 59/1.029+1000/1.029
= 57.34+971.82
= 1029.16 $ approximately.
Therefore return is= 29.16/1000 = 2.916% return.
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