Question

Last year Janet purchased a $1,000 face value corporate bond with a 9% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.81%. If Janet sold the bond today for $1,001.56, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places

Answer #1

Annual coupon = 9% of 1000 = 90

Current price = coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Current price = 90 * [1 - 1 / (1 + 0.0981)^20] / 0.0981 + 1000 / (1 + 0.0981)^20

Current price = 90 * [1 - 0.153873] / 0.0981 + 153.872911

Current price = 90 * 8.625149 + 153.872911

Current price = $930.1363

Rate of return = [(Ending value + coupon - beginning value) / beginning value] * 100

Rate of return = [(1,001.56 + 90 - 930.1363) / 930.1363] * 100

**Rate of return = 17.35%**

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