Question

One bond has a coupon rate of 7.2%, another a coupon rate of 8.6%. Both bonds pay interest annually, have 14-year maturities, and sell at a yield to maturity of 8.0%. a. If their yields to maturity next year are still 8.0%, what is the rate of return on each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Bond 1		Bond 2
Rate of return	................	%	......................	%

Does the higher-coupon bond give a higher rate of return over this period?

• Yes

• No

Answer 1

Bond1

K = N

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

k=1

K =14

Bond Price =∑ [(7.2*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^14

k=1

Bond Price = 934.05

K = N

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

k=1

K =13

Bond Price =∑ [(7.2*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^13

k=1

Bond Price = 936.77

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

=((936.77+72)/934.05-1)*100=8%

BOnd 2

K = N

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

k=1

K =14

Bond Price =∑ [(8.6*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^14

k=1

Bond Price = 1049.47

K = N

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

k=1

K =13

Bond Price =∑ [(8.6*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^13

k=1

Bond Price = 1047.42

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

=((1047.42+86)/1049.47-1)*100=8%

No both are same