Question

You buy an) 5.4% coupon, 7-year maturity bond for $946. A year later, the bond price is $1.056. Assume coupons are paid once a year and the face value is $1,000. a. What is the new yleld to maturity on the bond (one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Yield to maturity b. What is your bond's rate of return over the year? (Round your answer to 2 decimal places) Rate of retum

Answer 1

a

K = N

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

k=1

K =6

1056 =∑ [(5.4*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^6

k=1

YTM% = 4.32

b

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

=((1056+54)/946-1)

=17.34%