Question

Last year, Joan purchased a $1,000 face value corporate bond with an 12% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 11.43%. If Joan sold the bond today for $1,143.45, what rate of return would she have earned for the past year? Round your answer to two decimal places.

Answer 1

Market Price of the Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 12.00%]	PMT	120
Market Interest Rate or Yield to maturity on the Bond [11.43%]	1/Y	11.43
Maturity Period/Time to Maturity [25 Years]	N	25
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $884.1,046.54

The Rate of return would she have earned for the past year

Rate of return = [{Coupon Amount + (Selling price of the Bond today - Market Price of the Bond)} / Market Price of the Bond] x 100

= [{$120 + ($1,143.45 - $1,046.54} /$1,046.54] x 100

= [($120 + $96.91) / $1,046.54] x 100

= [$216.91 / $1,046.54] x 100

= 20.73%

“Hence, the rate of return she have earned for the past year will be 20.73%”