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.

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