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Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 8%. After receiving the coupon, you sold the bond today for $939.05. What is your return rate in one year? (Hint: find out how much did you pay for the bond last year?)

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Tundexi

Answer:

Rate of return = 6.64%

Explanation:

Annual coupon rate = 7.5% = 0.075

Face value = 1,000

Coupon payment = 1,000*0.075 = 75

YTM = 8%

Years = 20

Price of the bond = PV(8%, 20, 75, 7.5%)

Price of the bond = $950.91

Rate of return = Selling price + Coupon payment received - Purchase price / Purchase price

Rate of return = $939.05 + $75 - $950.91 / $950.91

Rate of return = $63.14 / $950.91

Rate of return = 0.0663996

Rate of return = 6.64%

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