Question

A bond has a face value of $1,000, a coupon of 5% paid annually, a maturity of 34 years, and a yield to maturity of 8%. What rate of return will be earned by an investor who purchases the bond for $652.39 and holds it for 1 year if the bond’s yield to maturity at the end of the year is 9%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Bond Face value Annual coupon rate Years to maturity $1,000.00 5% 34 Yield to maturity Current Price of Bond 8% $652.39 YTM at end of year Expected price of Bond at end of one year 9% $581.42 Rate of return -3.21% 13

Cell reference -

B Bond Face value Annual coupon rate Years to maturity 1000 0.05 34 -Nm to off Yield to maturity Current Price of Bond 0.08 =PV(C6, C4,-C3*C2,-C2,0) YTM at end of year 0.09 Expected price of Bond at end of one year =PV(C9,C4-1,-C3*C2,-C2,0) Rate of return =((C10-C7)+C3*C2)/C7

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.