Question

You buy a 20-year bond with a coupon rate of 9.4% that has a yield to maturity of 10.3%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 11.3%. What is your return over the 6 months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

Bond Par Value = $1,000

Coupon Rate = 9.40% semi-annually

When issued,

YTM = 10.30%

Time to Maturity = 20 years = 40 periods

Calculating Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 40, PMT = 47, I = 0.103/2]

PV = $924.34

After 6 months,

Time to Maturity = 39 periods

YTM = 11.30%

Calculating Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 39, PMT = 47, I = 0.113/2]

PV = $851.57

Rate of Return = (Ending Value - Initial Value + Coupon Payment)/Initial Value

Rate of Return = (851.57 - 924.34 + 47)/(924.34)

Rate of Return = -2.79%