Question

Question 15 5 pts Two years ago, Bob purchased a 20-year $1,000 par value zero-coupon bond for $311.80. If today (with 18 years to maturity) the bond is priced to yield 4.65%, what is his annualized return if he sells the bond? Hint: Calculate the price of the bond today, and use as FV to calculate the "return over 2 years. Your answer should be between 4.02 and 22.46, rounded to 2 decimal places, with no special characters.

Answer 1

Given,

Par value = $ 1000

Years to maturity (n) = 18 years

Yield (r) = 4.65% or 0.0465

Solution :-

Bond Price – today Par Value (1+r)n. $1000 (1+0.0465) 18 $1000 (1.0465) 18 $ 1000 2.26624149958 - $441.95923977 So, if & we go two years back, $441.25923922 would be future Value and $311.80 would be present value. Period (n) - 2 years let, annualized return be az Now, Future value=Present Value (1+8) $441.85923922 = $317.80(1+0)

$441.25923922 $311.80 - (1+0) 1.4151996126 = (1 +2² (1.4151996126Y - 10 1. 1896 = 1tr 1.1896 - 1 = 8 0. 1896 - r So, r = 0.1896 or 18.96% Thus, his annualized return is 18.96%