Question

Last year, you purchased a $1,000 par value bond with a 7% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 7.5%. After receiving the coupon, you sold the bond today for $920. What is your return rate in one year? (Hint: find out how much did you pay for the bond last year?)

Select one: a. 5.37% b. 9.18% c. 3.27% d. 4.32% e. 10.64%

Answer 1

Given about a bond,

Bond was purchased last year with following features,

Face value = $1000

coupon rate = 7%

years to maturity = 20 years

YTM = 7.5%

So price of the bond last year can be calculated on financial calculator using following values:

FV = 1000

N = 20

PMT = 7% of 1000 = 70

I/Y = 7.5

Compute for PV, we get PV = -949.03

So, bond was purchased for $949.03

today after the coupon payment, bond was sold for $920

So, return over the year = (920 + 70 - 949.03)/949.03 = 4.32%

Option d is correct.