Question

4. You purchased the Bond with 10% coupon paying annually, the face value is $1000, and its maturity is 10 years. Initially the market interest was 10% when you purchased the bond, and the interest rate went up to 20% over the year. Calculate the followings: 2. What is initial bond purchasing price? b. What is bond current yield? c. If the market interest rate went up to 20% from 10% at the end if first year, and you want to sell bons at the end of first year. What should be the selling price? d. You just hold the bond for one year and you want to calculate the rate of return of your bond investment. What is the rate of return?

Answer 1

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity rate = 10% (YTM of bonds = market interest rate) nper = 10 (Years remaining until maturity with 1 coupon payment each year) pmt = 1000 * 10% (annual coupon payment = face value * coupon rate) fv = 1000 (face value receivable on maturity) PV is calculated to be $1,000.00 =PV(10%,10,1000*10%, 1000) Annual cupon payment Price of bond Current yield 100 =1000*10% 1000 10% =100/1000 Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity rate = 20% (YTM of bonds = market interest rate) nper = 9 (Years remaining until maturity with 1 coupon payment each year) pmt = 1000 * 10% (annual coupon payment = face value * coupon rate) fv = 1000 (face value receivable on maturity) PV is calculated to be $596.90 =PV(20%,9,1000*10%, 1000) Bond price after 1 year Annual coupon payment Bond purchase price Rate of return 596.9 100 =1000*10% 1000 -30.31% =(596.90+100-1000)/1000