Question

# Jose purchased a euro bond, which has a par value of \$1,000, a 3% annual coupon...

Jose purchased a euro bond, which has a par value of \$1,000, a 3% annual coupon rate, and an annual yield to maturity of 2.80% with five years until maturity. The euro bond pays semiannual coupons. After two years Jose received four semi-annual coupons and he sold the bond at a price of \$1010. If he was able to invest the coupons at a semi-annual return of 2.50%, what is his total realized return over the two years?

Given

Face value = \$ 1000
Coupon payments = 3 % = 3 % / 2 x \$ 1000 = 1.5 % x \$ 1000 = \$ 15 [ Semi annual ]

Number of periods = 5 x 2 = 10 [ 5 years x 2 = 10 ]

Interest rate =YTM = I/Y = 2.8 % = 2.8 % / 2 = 1.4 % [ semi annual ]

Present Value = PV = ?

Present Value = PV = \$ 1009.27

The price that the Euro bond was bought = \$ 1009.27

The selling price = \$ 1010

The coupon amount received after four semiannual periods or 2 years = \$ 15 x 4 = \$ 60

Total realized return over the two years = \$ 1010 + \$ 60 - \$ 1009.27
Total realized return over the two years = \$ 1070 - \$ 1009.27
Total realized return over the two years = \$ 60.73

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