Question

Last year Janet purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.4%. If Janet sold the bond today for $1,069.01, 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

Value of bond when bought=Coupon payment*present value annuity factor(10.4%,15 years)+Face value*Present value inflow factor(10.4%, 15 years)

Coupon=$1000*9%=$90

Hence, value of bond=$90*7.4355+1000*0.2267=$895.8963

Value at which sold=$1069.01

Hence total return=value at which sold-value at which bought

(assuming she sold before receiving coupon)

=1069.01-895.8963=$173.11

Hence rate of return=173.11/895.8963=19.32%

Alternatively, total return=value at which sold-value at which bought+coupon for one year

(assuming she sold after receiving coupon)

=1069.01-895.8963+90=$263.11

Hence rate of return=263.11/895.8963=29.36%