Question

Last year Janet purchased a $1,000 face value corporate bond with an 12% annual coupon rate and a 20-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.44%. If Janet sold the bond today for $1,045.35, 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

Par/Face value	1000
Annual Coupon rate	0.12
Annual coupon	120
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is .1244 and t is the time period in years
price of the bond = sum of present values of future cash flows
r	0.1244
t	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
future cash flow	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	1120
present value	106.7236	94.91603	84.41483	75.07544	66.76934	59.38219	52.81234	46.96935	41.77281	37.1512	33.04091	29.38537	26.13427	23.24286	20.67134	18.38433	16.35035	14.5414	12.93259	107.3498
sum of present values	968.02
Janet purchased the bond for $968.02 one year ago.
Janet sold the bond today for $1045.35.
In addition, Janet will receive a coupon payment of $120 between the time she purchased the bond
and the time she sold the bond.
Janet's rate of return for the past year			(1045.35 - 968.02 + 120)/968.02
Janet's rate of return for the past year			0.203849
Janet's rate of return for the past year is 20.38%.