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15 September, 17:50

One year ago, you purchased an 8% coupon rate bond when it was first issued and priced at its face value of $1,000. Yesterday the bond paid its second semi-annual coupon. The bond currently has 7 years left until maturity and has a yield to maturity of 12%.

Required:

1. If you sell the bond today, what will your return have been from this investment during the year you held the bond and collected the coupon payments?

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  1. 15 September, 17:56
    0
    The rate of return - 10.59%

    Explanation:

    In selling the bond today it would be necessary to determine its fair price today using the present value formula in excel:

    =pv (rate, nper, pmt, fv)

    rate is semi-annual yield on the bond 6% (12%/2)

    nper is the number of interest the bond would pay more before maturity, which is 7 years multiplied by 2=14

    pmt is the semi-annual interest payable which is 8%/2*$1000=$40

    fv is the face value of $1000

    =-pv (6%,14,40,1000)

    pv=$814.10

    The rate of return = price today+coupon interest/initial price

    price today is $814.10

    coupon interest for one year=8%*1000=$80

    fv is $1000

    rate of return = ($814.10-$1000 + $80) / $1000

    =-10.59%
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