Question

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?

Answer 1

Answer-

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