Question

An investor purchases at the beginning of the year a 5-year IBM bond paying a coupon of 6% and yielding 5%. She sells it at the end of the year when the yield had decreased to 4%. What is her one year rate of return?

Answer 1

8.56%

Step-1:Price at the beginning of year
Price	=-pv(rate,nper,pmt,fv)
	= $ 1,043.29
Where,
rate	=	5%
nper	=	5
pmt	=	$         60.00
fv	=	$   1,000.00
Step-2:Price at the end of year
Price	=-pv(rate,nper,pmt,fv)
	= $ 1,072.60
Where,
rate	=	4%
nper	=	4
pmt	=	$         60.00
fv	=	$   1,000.00
Step-3:One year rate of return
Rate of return	=rate(nper,pmt,pv,fv)
	= 8.56%
Where,
nper	=	1
pmt	=	$         60.00
pv	=	$ -1,043.29
fv	=	$   1,072.60