Question

Suppose that you just bought a four year $1,000 coupon bond with a coupon rate of 6.8% when the market interest rate is 6.6%. One year later, the market interest rate falls to 4.6% The rate of return earned on the bond during the year was % (Round your response to two decimal places.)

Answer 1

Solution :-

Face value = $1000

Coupon rate = 6.6%

Coupon payment = 6.6% of 1000 = $66

After 1 years, 3 years left to maturity; i = 4.6%

Calculating value of bond after 1 year ;

= 66(P/A, 4.6%, 3) + 1000(P/F, 4.6%, 3)

= 66× 2.74379 + 1000×0.87379

= 181.09 + 873.79

= $1054.88

Bond was bought for $1,000, as Intrest rate was equal to coupon rate, Therefore

Total Value received in 1 year = $66 + $1,054.88 = $1120.88

Return in 1 year can be calculated as ;

= [($1,120.88-$1,000)/$1000]×100

= 0.12088×100 = 12.088% or 12.10%

Thus, the rate of return earned is 12.10%