Question

a. The fifteen-year bond yields 6.7% and has a coupon of 8.7%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price            $

b. What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Total return             %

Answer 1

a). To find the bond price in one year time, we need to put the following values in the financial calculator:

INPUT	15-1=14	6.7		8.7	100
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-117.81

So, price one year hence = $117.81

b). First we need to find the current bond price, for that we need to put the following values in the financial calculator:

INPUT	15	6.7		8.7	100
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-118.57

So, Current Bond Price = $118.57

Return = (Price of the bond a year after - Price now + coupon received in the year) / Price now

= [$117.81 - $118.57 + $8.70) / $118.57

= $7.94 / $118.57 = 0.067, or 6.70%