Question

# Last year Janet purchased a \$1,000 face value corporate bond with an 7% annual coupon rate...

Last year Janet purchased a \$1,000 face value corporate bond with an 7% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 7.42%. if janet sold the bond today for \$991.19, what rate of return would she have earned for the past year? round your answer to two decimal places.

Bond's Purchase Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{7%*\$1,000} * {(1 - (1 + 0.0742)^-(15)) / (0.0742)}] + [\$1,000 / {1 + (0.0742)}^(15)]

= [\$70 * {0.6582 / 0.0742}] + [\$1,000 / 2.9260]

= [\$70 * 8.8711] + \$341.76

= \$620.98 + \$341.76 = \$962.74

Rate of Return earned = [Sale Price - Purchase Price + Coupon Interest] / Purchase Price

= [\$991.19 - \$962.74 + \$70] / \$962.74

= \$98.45 / \$962.74 = 0.1023, or 10.23%

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