Question

You buy a(n) 5.5% coupon, 8-year maturity bond for $985. A year later, the bond price is $1,160. Assume coupons are paid once a year and the face value is $1,000.

a.	What is the new yield to maturity on the bond (one year from now)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b.	What is your bond's rate of return over the year? (Round your answer to 2 decimal places.)

Answer 1

a.

since it was an 8yr maturity bond, a year later would mean 8-1 = 7yrs left to maturity (n or NPER)

Bond price given as $1160 (PV)

Face value given as $1000 (FV)

,Coupon payment per year or PMT 1000 * 5.5% = 55

Approx. YTM = [Coupon + (Face value - Market value of bond) / total period] / [(Face value + Market value of bond) / 2]

or

We can find the yield to maturity using RATE function in excel as it gives the exact bond price mentioned in the question

Rate(nper, PMT, PV,FV, Type)

PV is entered as a negative figure

RATE(7,55,-1160,1000)

2.93790493%

2.94% when rounded to two decimal places

b.

Total Rate of return earned (with coupon) = ((Current price + coupon) - Purchase price) / Purchase price

((1160+55) - 985) / 985

(1215-985)/985

230 / 985

23.3503% or 23.35% when rounded to 2 decimal places