Question

A 7.10 percent coupon bond with 21 years left to maturity is priced to offer a 5.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.7 percent.

What would be the total return of the bond in dollars? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

What would be the total return of the bond in percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

K = N

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

k=1

K =21

Bond Price =∑ [(7.1*1000/100)/(1 + 5.2/100)^k]     +   1000/(1 + 5.2/100)^21

k=1

Bond Price = 1239.37 = beginning price

K = N

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

k=1

K =20

Bond Price =∑ [(7.1*1000/100)/(1 + 5.7/100)^k]     +   1000/(1 + 5.7/100)^20

k=1

Bond Price = 1164.56 = ending price

total return of the bond in dollar= eniding price+coupon-beginning price

=1164.56+71-1239.37

=-3.81

total return of the bond in percent=(total return of the bond in dollar/beginning price)

=-3.81/1239.37

=-0.31%