Question

Part 1 of 2 - Bond Price & Tot Return Question 1 of 4 2.25 Points You paid $1046 for a $1,000 par, 10-year bond with a 8% coupon rate and annual payments. You are selling it today, after receiving 5 coupon payments, for $968. You reinvested coupons at the 4.6% annual rate. What is your total return? (Report your answer to two decimals, without the % symbol. E.g., if your answer is 5.1538%, enter it as 5.15.) Question 2 of 4 2.25 Points 4 years ago, you paid $1027 for a $1,000 par bond that has a 5% coupon with semiannual payments. You are selling it today for $1091. You reinvested coupons at the 3.4% annual rate. What is your total return? (Report your answer to two decimals, without the % symbol. E.g., if your answer is 5.1538%, enter it as 5.15.)

Answer 1

1). Total Return = [(Selling Price + Coupon Payment) / Purchase Price]^1/n - 1

= [{$968 + (5 * $80)} / $1046]^1/5 - 1

= [$1368 / $1046]^0.2 - 1

= [1.3078]^0.2 - 1

= 1.0551 - 1 = 0.0551, or 5.51%

2). Periodic Return = [(Selling Price + Coupon Payment) / Purchase Price]^1/n - 1

= [{$1091 + (4 * 2 * $25)} / $1027]^1/(4*2) - 1

= [$1291 / $1027]^1/8 - 1

= [1.2571]^0.125 - 1

= 1.029 - 1 = 0.029, or 2.90%

Total Return = Periodic Rate * No. of compounding periods in a year = 2.90% * 2 = 5.80%