Question   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%

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