Question

A government bond matures in 30 years, makes annual coupon payments of 6.0% and offers a yield of 3.7% annually compounded. Assume face value is $1,000

Now suppose that , five year later, the bond yields 2.7% r. What return did the bondholder earn over the 5 years?

Group of answer choices:

8.08%

34.10%

41.25%

17.11%

38.60%

Answer 1

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 3.7%

And n is the no of Compounding periods 30 years

Coupon 6%

=

= 1412.61

Value of Bond after 5 years

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 2.7%

And n is the no of Compounding periods 25 years

Coupon 6%

=

= 1594.32

% Return = Coupons + Caital gain / Purcahse PRice

= (60*5) + (1594.32 - 1412.61) / 1412.61

= 481.71 / 1412.61

= 34.10%

Option 2 is correct.

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