Question

A 20 year bond has a price of $1091, a yield to maturity of 9%, and a coupon rate of 10%. What rate of return will the holder of the bond expect to earn from the dividend payment next year?

A. 9.17%

B. 10%

C. 8%

D. 10.47%

Answer 1

Answer is 9.17%

Face Value = $1,000

Annual Coupon Rate = 10.00%
Annual Coupon = 10.00% * $1,000
Annual Coupon = $100

Current Price = $1,091

Dividend Yield = Annual Coupon / Current Price
Dividend Yield = $100 / $1,091
Dividend Yield = 0.0917 or 9.17%

So, holder of the bond can expect a rate of return of 9.17% from the dividend payment.