Question

You bought one of Great White Shark Repellant Co.’s 5.8 percent coupon bonds one

year ago for $1,030. These bonds make annual payments and mature 14 years from now.

Suppose you decide to sell your bonds today, when the required return on the bonds is 5.1

percent. What was the total return?

Answer 1

Current Market Price of the Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.80%]	PMT	58
Market Interest Rate or Yield to maturity on the Bond [5.10%]	1/Y	5.10
Maturity Period/Time to Maturity [14 Years]	N	14
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $1,068.85.

The total rate of return on the Bond

The total rate of return on the Bond = [{Annual Coupon Amount + (Change in Bond Price)} / Current Price] x 100

= [{$58 + ($1,068.85 - $1,030)} / $1,030] x 100

= [($58 + $38.85) / $1,030] x 100

= [$96.85 / $1,030] x 100

= 9.40%

“Hence, the total rate of return on the Bond will be 9.40%”