Question

BOND RETURNS Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate and a 10-year maturitBOND VALUATION Madsen Motorss bonds have 12 years remaining to maturity. Interest is paid annually; they have a $1,000 par vYIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 20 years to maturity, and a 5% annual coupon and sells for

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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%

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