Question

Last year Janet purchased a $1,000 face value corporate bond with a 12% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.91%. If Janet sold the bond today for $1,150.04, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Price of Bond when issued = PV of CFs from it.

Year	CF	PVF @9.91%	Disc CF
1	$    120.00	0.9098	$    109.18
2	$    120.00	0.8278	$      99.34
3	$    120.00	0.7532	$      90.38
4	$    120.00	0.6853	$      82.23
5	$    120.00	0.6235	$      74.82
6	$    120.00	0.5673	$      68.07
7	$    120.00	0.5161	$      61.93
8	$    120.00	0.4696	$      56.35
9	$    120.00	0.4272	$      51.27
10	$    120.00	0.3887	$      46.65
10	$ 1,000.00	0.3887	$    388.71
Price when bond is issued	$ 1,128.92

Rate earned past Year = [ [ Coupon + P1 ] / P0 ] - 1  

= [ [ 120 + 1150.04 ] / 1128.92 ] - 1  

= [ [ 1270.04 ] / 1128.92 ] - 1  

= 1.1250 - 1

= 0.1250 i.e 12.50%

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