Question

Today, you purchase a corporate bond with an annual coupon rate of 5.50% and 3 years...

Today, you purchase a corporate bond with an annual coupon rate of 5.50% and 3 years to maturity. The bond is currently yielding 4.21%. You plan to sell the bond in 1 year when you expect the bond to yield 2.21%. What is the total dollar return you'll receive from capital gain/loss after selling the bond?

a. $64.02

b. $36

c. $28.02 or d. $55

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Answer #1

Today:

Face Value of Bond = $1,000
Annual Coupon = 5.50%*$1,000 = $55.00
Time to Maturity = 3 years
Yield to Maturity = 4.21%

Price of Bond = $55 * PVIFA(4.21%, 3) + $1,000 * PVIF(4.21%, 3)
Price of Bond = $55 * (1 - (1/1.0421)^3) / 0.0421 + $1,000 / 1.0421^3
Price of Bond = $1,035.66

1 year later:

Face Value of Bond = $1,000
Annual Coupon = $55.00
Time to Maturity = 2 years
Yield to Maturity = 2.21%

Price of Bond = $55 * PVIFA(2.21%, 2) + $1,000 * PVIF(2.21%, 2)
Price of Bond = $55 * (1 - (1/1.0221)^2) / 0.0221 + $1,000 / 1.0221^2
Price of Bond = $1,063.68

Purchase Price = $1,035.66
Selling Price = $1,063.68

Dollar Capital Gain = Selling Price - Purchase Price
Dollar Capital Gain = $1,063.68 - $1,035.66
Dollar Capital Gain = $28.02

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