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

Current 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 7.10%]	PMT	71
Market Interest Rate or Yield to maturity on the Bond [5.20%]	1/Y	5.20
Maturity Period/Time to Maturity [21 Years]	N	21
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 = $1,239.37.

Price of the Bond in 1 year

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.10%]	PMT	71
Market Interest Rate or Yield to maturity on the Bond [5.70%]	1/Y	5.70
Maturity Period/Time to Maturity [21 Years – 1 Year]	N	20
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 = $1,164.56.

The total return of the bond in dollars

The total return of the bond in dollars = Annual Coupon amount + Change in the bond’s price in dollars

= $71 + [$1,164.56 - $1,239.37]

= $71 - $74.81

= -$3.81 (Negative)

“The total return of the bond in dollars will be -$3.81 (Negative)”

The total return of the bond in percentage

The total return of the bond in percentage = [The total return of the bond in dollars / Current Bond Price] x 100

= [-$3.81 / $1,239.37] x 100

= -0.31% (Negative)

“The total return of the bond in percentage will be -0.31% (Negative)”