Question

(Bond valuation) At the beginning of the year, you bought a $1000 par value corporate bond with an annual coupon rate of 16 percent and a maturity date of 15 years. When you bought the bond, it had an expected yield to maturity of 8 percent. Today the bond sells for $1970.

a. What did you pay for the bond?

b. If you sold the bond at the end of the year, what would be your one-period return on the investment? Assume that you did not receive any interest payment during the holding period.

Answer #1

a)

Annual coupon payment = 0.16 $ 1000 = $ 160

The price of the bond is found the following equation

**The price paid for the bond = $ 1054.27**

**-----------------------------------------------------------------------------------------------------**

**b)**

**One period return on the investment =
86.86%**

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