Question

Last year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of purchase, it had an expected yield tomaturity if 9.79%. If Joan sold the bond today for $1,060.90, what rate of return would she have earned for the past year?

Answer 1

The price he paid for the bond at 9.79% yield

	1	2	3	4	5	6	7	8	9	10
	110	110	110	110	110	110	110	110	110	1110
	0.91083	0.829611	0.755634	0.688254	0.626882	0.570983	0.520068	0.473694	0.431454	0.392982
Present value	100.1913	91.25719	83.11977	75.70796	68.95706	62.80815	57.20753	52.10632	47.45999	436.2095
Total										1075.025

Rate of return = 1075.025-1060.90 = - 1.31% answer

Answer 2

N=10

I=9.79

PMT=110

FV=1000

CPT PV = $1075.02

Return =

(final selling price) + (coupon payment received) - (orginal price purchased price ) / orginal price purchased price

=1060.49+110-1075.02 /1075.02

=95.47 /1075.02

Return = = .0888 = 8.88% answer

Answer 3

The first thing you need to do is to find the price that he paid when he bought the bond. You can do this by finding all the cash flows to the bond andthen discounting them at 9.79%. You will find that the price of the bond is $1075.025.

If he sells after one year, he gets $1060.49 plus the $110 coupon -- or 1170.49. If we divide the ending value by the starting value, it will give us thegross return:

1170.49/1075.025 = 1.088803. Subtract one to get the return of 8.88%

Answer 4

I used the PV function in Excel to calculate the price Joan paid for the bond. The formula is:

=PV(9.79%,10,-110,-1000)

This equals $1,075.02

So she paid $1,075.02 for the bond.

She received interest on the bond of ($1,000 X 11%) = $110 at the end of the year, plus the $1,060.49 when she sold it.

That totals $1,170.49

$1,170.49 / $1,075.02 = 1.0888

Joan earned 8.88% on the bond while she owned it