Question

Last year Janet purchased a $1,000 face value corporate bond with an 8% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.44%. If Janet sold the bond today for $1,021.35, 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

Calculation of purchase price:

Face Value = $1,000

Annual Coupon Rate = 8%
Annual Coupon = 8% * $1,000
Annual Coupon = $80

Time to Maturity = 15 years
Annual YTM = 12.44%

Price of Bond = $80 * PVIFA(12.44%, 15) + $1,000 * PVIF(12.44%, 15)
Price of Bond = $80 * (1 - (1/1.1244)^15) / 0.1244 + $1,000 / 1.1244^15
Price of Bond = $704.57

Purchase Price of Bond = $704.57
Selling Price of Bond = $1,021.35

Rate of Return earned = (Selling Price + Coupon Received - Purchase Price) / Purchase Price
Rate of Return earned = ($1,021.35 + $80.00 - $704.57) / $704.57
Rate of Return earned = 0.5632 or 56.32%

So, Janet earned 56.32% during the last year.