Question

You buy a 20-year bond with a coupon rate of 9.8% that has a yield to maturity of 10.9%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 11.9%. What is your return over the 6 months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

Please Explain Answer

Answer 1

Bond Par Value = $1,000

Time to maturity = 20 years

Coupon Rate = 9.8% semi-annually

YTM = 10.90%

Calculating Purchase price of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 40, PMT = 49, I = 0.109/2]

PV = $911.16

Calculating Selling Price,

Using TVM Calculation,

PV = [FV = 1000, T = 39, PMT = 49, I = 0.119/2]

PV = $842.05

Return = (Final Value - Initial Value + Coupon)/Initial Value

Return over 6 months = (842.05 - 911.16 + 49)/911.16

Return over 6 months = -2.21%

Price of Bond decreased after 6 months due to increase in YTM.