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

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%

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