Question

33) You purchased a coupon bond on January 2, 2020 with the following information: Coupon rate: 6.00% Interest payment: annual Maturity: 5 years Par Amount: $10,000 Yield to Maturity: 6.20% 33.1-What price did you pay for this bond? Show all calculations. 33.2-If you sold the bond exactly two years later at a price of $101, what is your annualized rate of return for the two years, assuming you did not reinvest any coupon payments? You must show your work to receive full credit.

Answer 1

Ans 1) Formula for bond price

bond price = coupon * ( 1 - (1 + maturity yield)^-n)/maturity yield + F/(1+maturity yield)^n

where n is maturity

bond price = 600 * (1 - (1.062)^-5)/.062 + 10000/(1.062)^5

= $9916.21

Ans 2) Total return in two years = (Selling price of bond - buying price of bond + coupon payments in two years)

= (10100 - 9916.12 + 2*600)

= $1383.88  

Annualized return = (1 + 1383.88/9916.12)^(.5)

= (1.139559)^.5

= 6.75%