A bond is issued with a coupon of 6% paid annually, a maturity of 34 years,...
A bond is issued with a coupon of 6% paid annually, a maturity of 34 years, and a yield to maturity of 8%. What rate of return will be earned by an investor who purchases the bond for $768.26 and holds it for 1 year if the bond’s yield to maturity at the end of the year is 9%?
Homework Answers
Calculation of selling price:
Face value = $1,000
Annual coupon rate = 6.00%
Annual coupon = 6.00% * $1,000
Annual coupon = $60
Time to maturity = 33 years
Annual YTM = 9.00%
Selling price = $60 * PVIFA(9.00%, 33) + $1,000 * PVIF(9.00%,
33)
Selling price = $60 * (1 - (1/1.09)^33) / 0.09 + $1,000 *
(1/1.09)^33
Selling price = $686.07
Holding period return = (Selling price + Coupon received -
Purchase price) / Purchase price
Holding period return = ($686.07 + $60.00 - $768.26) /
$768.26
Holding period return = -$22.19 / $768.26
Holding period return = -0.0289 or -2.89%
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