Question

One year ago, an investor purchased a 10-year 8% annual coupon bond at par of $1,000. Today (with 9 years to maturity) the bond is priced to yield 7.70%. If the bond is sold, what is the total return to the investor (interest plus appreciation) for the 1-year holding period? Hint: The total return includes the coupon rate plus the appreciation (or depreciation) due to the change in rates. Therefore, calculate the current price based on the yield, and then calculate the total return over 1 year based on that price and the coupon payment. Your answer should be between 6.32 and 17.42, rounded to 2 decimal places, with no special characters.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(8*1000/100)/(1 + 7.7/100)^k]     +   1000/(1 + 7.7/100)^9

k=1

Bond Price = 1018.98

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*8/(100)

I/Y =7.7

N =9

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(7.7/(100),9,-8*1000/(100),-1000,)

rate of return/HPR = ((Selling price+Coupon amount)/Purchase price-1)

=((1018.98+80)/1000-1)

=9.9%