Question

(Bond valuation) At the beginning of the year, you bought a $1,000 per value corporate bond with an annual coupon rate of 8 percent and a maturity date of 15 years. When you bought the bond, it had an expected yield to maturity of 11 percent. Today the bond sells for $920.

a. What did you pay for the bond?

b. If you sold the bond at the end of the year, what would be your one-period return on the investment? Assume that you did not receive any interest payment during the holding period.

Answer 1

A. Value of the bond today

Bond yields coupon rate of 11 percent

Thus coupon amount will be Bond value * Coupon rate

i.e. 1000*8%= 80

Value of Bond = Present Value of Principal Price + Present Value of Coupon amount

= 1000 * Present Value Interest Factor(11,15) + 80 * Present Value Annuity Factor (11,15)

= 1000*0.2090 + 80* 7.1908

= 209 + 575.27

= 784

Thus Value of Bond will be approximately Rs.784

B. Based on the above answer the buying value will be Rs.784 and the selling value as per question is Rs.920

Thus the beneficial return will be 136

As interest is not to be considered net return will be Rs.136

Thus one year period return will be considered as : Return / Bond Value * 100

: 136/784 *100

: 17.35%

Thus net return will be 17.35 % without consideration of interest