Question

Suppose you purchase a bond with 15 years left to maturity, a coupon rate of 5%, yield to maturity of 8%, and a par value of $1000. If you hold it for one year and sell it for $800, what is your realized total rate of return?

a. 13.35

b. 7.10

c. 7.64

d. 14.37

e. 5

Answer 1

Given about a bond,

years to maturity = 15 years

coupon rate = 5%

face value = $1000

=> Annual coupon payment = 5% of 1000 = $50

yield to maturity = 8%

So, current price of the bond can be calculated on financial calculator using following values:

FV= 1000

PMT = 50

N = 15

I/Y = 8

compute for PV, we get PV = -743.22

So, current price of the bond is $743.22

if after 1 year, bond is sold for $800

realized return = (selling price + coupon - purchase price)/purchase price = (800 + 50 - 743.22)/743.22 = 14.37%

Option d is correct.