Question

Last year Janet purchased a $1,000 face value corporate bond with an 12% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.2%. If Janet sold the bond today for $1,140.91, 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

Last Year:

Face Value = $1,000

Annual Coupon Rate = 12%
Annual Coupon = 12% * $1,000
Annual Coupon = $120

Time to Maturity = 25 years
Annual YTM = 10.20%

Purchase Price = $120 * PVIFA(10.20%, 25) + $1,000 * PVIF(10.20%, 25)
Purchase Price = $120 * (1 - (1/1.102)^25) / 0.102 + $1,000 / 1.102^25
Purchase Price = $1,160.91

Selling Price = $1,140.91

Rate of Return earned = (Selling Price + Coupon received - Purchase Price) / Purchase Price
Rate of Return earned = ($1,140.91 + $120 - $1,160.91) / $1,160.91
Rate of Return earned = 8.61%

So, Janet earned a rate of return of 8.61% last year.