Question

BOND RETURNS Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.3%. If Janet sold the bond today for $1,026.98, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

Answer to Question 1:

Calculation of purchase price:

Face value = $1,000

Annual coupon rate = 7%
Annual coupon = 7% * $1,000
Annual coupon = $70

Annual YTM = 9.30%
Time to maturity = 10 years

Purchase price = $70 * PVIFA(9.30%, 10) + $1,000 * PVIF(9.30%, 10)
Purchase price = $70 * (1 - (1/1.093)^10) / 0.093 + $1,000 / 1.093^10
Purchase price = $854.32

Calculation of rate of return earned:

Purchase price = $854.32
Coupon received = $70
Selling price = $1,026.98

Rate of return = (Selling price + Coupon received - Purchase price) / Purchase price
Rate of return = ($1,026.98 + $70.00 - $854.32) / $854.32
Rate of return = $242.66 / $854.32
Rate of return = 0.2840 or 28.40%