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**

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