Question

Problem 7-18 (similar to) Question Help (Bondholders' expected rate of return) You own a bond that has a par value of $1,000 and matures in 12 years. It pays an annual coupon rate of 12 percent. The bond currently sells for $1.200. What is the band's expected rate of return? The bond's expected rate of return is % (Round to two decimal places.)

Answer 1

Expected Ret is the Rate at which PV of CFs are equal to Bond Price.

Year	CF	PVf @9%	Disc CF	PVF @10%	Disc CF
0	$ -1,200.00	1.0000	$ -1,200.00	1.0000	$ -1,200.00
1	$     120.00	0.9174	$     110.09	0.9091	$     109.09
2	$     120.00	0.8417	$     101.00	0.8264	$        99.17
3	$     120.00	0.7722	$        92.66	0.7513	$        90.16
4	$     120.00	0.7084	$        85.01	0.6830	$        81.96
5	$     120.00	0.6499	$        77.99	0.6209	$        74.51
6	$     120.00	0.5963	$        71.55	0.5645	$        67.74
7	$     120.00	0.5470	$        65.64	0.5132	$        61.58
8	$     120.00	0.5019	$        60.22	0.4665	$        55.98
9	$     120.00	0.4604	$        55.25	0.4241	$        50.89
10	$     120.00	0.4224	$        50.69	0.3855	$        46.27
11	$     120.00	0.3875	$        46.50	0.3505	$        42.06
12	$     120.00	0.3555	$        42.66	0.3186	$        38.24
12	$ 1,000.00	0.3555	$     355.53	0.3186	$     318.63
NPV			$        14.82		$      -63.73

Expected Ret = Rate at which least +ve NPV + [ NPV at that rate / change in NPV due to1% inc in disc Rate ] * 1%

= 9% + [ 14.82 / 78.55 ] * 1%

= 9% + 0.19%

=9.19%