In: Finance
Last year Janet purchased a $1,000 face value corporate bond with an 8% annual coupon rate and a 30-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.56%. If Janet sold the bond today for $927.06, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.
Market Price of the Bond
The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
Here, the calculation of the Bond Price using financial calculator is as follows
Variables |
Financial Calculator Keys |
Figures |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 8.00%] |
PMT |
80 |
Market Interest Rate or Yield to maturity on the Bond [12.56%] |
1/Y |
12.56 |
Maturity Period/Time to Maturity [30 Years] |
N |
30 |
Bond Price |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $647.38.
The Rate of return would she have earned for the past year
Rate of return = [{Coupon Amount + (Selling price of the Bond today - Market Price of the Bond)} / Market Price of the Bond] x 100
= [{$80 + ($927.06 - $647.38} / $927.06] x 100
= [($80 + $279.68) / $927.06] x 100
= [$359.68 / $927.06] x 100
= 55.56%
“Hence, the rate of return she have earned for the past year will be 55.56%”