Question

Suppose you purchase a 10-year bond with 6.3% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 4.7% when you purchased and sold the bond.

Question

A. What cash flows will you pay and receive from your investment in the bond per $100 face value? (Draw a timeline)

B. What is the annual rate of return of your investment? (Round to one decimal place)

Answer 1

calculation buy price of bond

=interest*PVAF(4.7%, 10 YEARS)+MATURITY VAVLUE*PVF(4.7%,10th YEAR)

=6.3*7.835+100*0.632

=$112.56

caluculation of sell price

sold on 4th year end remaing year 6

=interest*PVAF(4.7%, 6 YEARS)+MATURITY VAVLUE*PVF(4.7%,6th YEAR)

=6.3*5.123+100*0.759

=107.4

year	cashflows
0	-112.56
1	6.3
2	6.3
3	6.3
4	6.3
4	107.4
RETURN(sum of cashflows)	20.04

hodling RETURN=(RETURN)/PURCHASE PRICE

=20.04/112.56

=17.80 for four years

per annum =17.80%/4

=4.45%

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