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6 December, 18:22

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $102 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is:

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  1. 6 December, 19:37
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    This question is incomplete. However I found the full question on the web that it is asking for rate of return if the yield to maturity at the end of the year is 6%. It is calculated as follows;

    Explanation:

    In one year, the time left to maturity is 1 year since this is a 2-year maturity bond.

    Rate of return formula = (P1 + Coupon - P0) / P0

    whereby P1 = Next year's price

    P0 = current price

    P1 = (102 + 1000) / 1.06

    P1 = 1039.62

    P0 = 1000 (this is given in the question)

    Rate of return = (1039.62 + 102 - 1000) / 1000

    = 141.62 / 1000

    = 0.14162 or 14.16% as a percentage
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