Question

The twenty-year bond yields 6.1% and has a coupon of 8.1%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price            $

b. What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Total return             %

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =19

Bond Price =∑ [(8.1*100/100)/(1 + 6.1/100)^k]     +   100/(1 + 6.1/100)^19

k=1

Bond Price = 122.14

b

Current price:

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(8.1*100/100)/(1 + 6.1/100)^k]     +   100/(1 + 6.1/100)^20

k=1

Bond Price = 122.75

rate of return = ((selling price+coupon)/purchase price-1)*100

=((122.14+8.1)/122.75-1)*100= 6.1%