Question

A bond trader buys a bond with 3% coupon rate and 2 years to maturity at a yield to maturity of 2.5%. A year later, the trader sells the bond at a yield to maturity of 4%. What is the trader’s total return?

Answer 1

Let Par Value =1000
Coupon =3%*1000 = 30
Number of Years = 2
YTM = 2.5%
Price of Bond = PV of Cash Flows + PV of Par Value = 30*(1-(1+2.5%)^-2/2.5% +1000/(1+2.5%)^2 = 1009.64

YTM after 1 year = 4%
Number of years of Maturity = 1
Price of Bond = PV of Cash Flows + PV of Par Value = 30*(1-(1+4%)^-1/4% +1000/(1+4%)^1 = 990.38

Trader's Total return = ( Price of Bond later - Price of Bond Earlier + coupon)/ Price of Bond Earlier = (990.38-1009.64+30)/1009.64 = 1.06%