Suppose that today you buy a 6 percent annual bond, paid annually, for $1,010. The bond...
Suppose that today you buy a 6 percent annual bond, paid annually, for $1,010. The bond has 10 years to maturity. The rate of return you expect to earn on this bond is closest to:
|
A. |
5.86% |
|
|
B. |
1.00% |
|
|
C. |
10.00% |
|
|
D. |
6.00% |
Homework Answers
Solution:
Calculation of rate of return on bond(YTM).
Assuming face value of bond is $1000
Rate of return=[Annual coupon+(Face value-Purchase Value)/Years to maturity]/(Face value+Purchase Value)/2
=[$60+($1000-$1010)/10]/($1000+$1010)/2
=$59/$1005
=0.0587 or 5.87%
Therefore correct answer is Option A i.e 5.86%
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