Question

BOND RETURNS

Last year Janet purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 30-year maturity. At the time of the purchase, it had an expected yield to maturity of 8.56%. If Janet sold the bond today for $1,069.76, 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

At the time of the purchase:

Par Value = $1,000

Annual Coupon Rate = 9.0%
Annual Coupon = 9.0% * $1,000
Annual Coupon = $90

Time to Maturity = 30 years
Annual YTM = 8.56%

Purchase Price = $90 * PVIFA(8.56%, 30) + $1,000 * PVIF(8.56%, 30)
Purchase Price = $90 * (1 - (1/1.0856)^30) / 0.0856 + $1,000 / 1.0856^30
Purchase Price = $1,047.03

Selling Price = $1,069.76

Rate of Return Earned = (Selling Price - Purchase Price + Coupon Received) / Purchase Price
Rate of Return Earned = ($1,069.76 - $1,047.03 + $90.00) / $1,047.03
Rate of Return Earned = 0.1077 or 10.77%