Question

In: Finance

Last year Janet purchased a $1,000 face value corporate bond with an 11% annual coupon rate...

Last year Janet purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 30-year maturity. At the time of the purchase, it had an expected yield to maturity of 13.84%. If Janet sold the bond today for $925.66, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

Solutions

Expert Solution

Price Last Year = PV of future CFs from it.

Year CF PVF @13.84% Disc CF
1 $    110.00             0.8784 $   96.63
2 $    110.00             0.7716 $   84.88
3 $    110.00             0.6778 $   74.56
4 $    110.00             0.5954 $   65.50
5 $    110.00             0.5230 $   57.53
6 $    110.00             0.4594 $   50.54
7 $    110.00             0.4036 $   44.39
8 $    110.00             0.3545 $   39.00
9 $    110.00             0.3114 $   34.26
10 $    110.00             0.2736 $   30.09
11 $    110.00             0.2403 $   26.43
12 $    110.00             0.2111 $   23.22
13 $    110.00             0.1854 $   20.40
14 $    110.00             0.1629 $   17.92
15 $    110.00             0.1431 $   15.74
16 $    110.00             0.1257 $   13.83
17 $    110.00             0.1104 $   12.14
18 $    110.00             0.0970 $   10.67
19 $    110.00             0.0852 $      9.37
20 $    110.00             0.0748 $      8.23
21 $    110.00             0.0657 $      7.23
22 $    110.00             0.0577 $      6.35
23 $    110.00             0.0507 $      5.58
24 $    110.00             0.0446 $      4.90
25 $    110.00             0.0391 $      4.31
26 $    110.00             0.0344 $      3.78
27 $    110.00             0.0302 $      3.32
28 $    110.00             0.0265 $      2.92
29 $    110.00             0.0233 $      2.56
30 $    110.00             0.0205 $      2.25
30 $ 1,000.00             0.0205 $   20.47
Price Last Year $ 799.00

Rate of Ret = [ [ P1 - P0 ] + Coupon ] / P0

P1 = Price Today

P0 = Price last Year

Rate of Ret = [ [ P1 - P0 ] + Coupon ] / P0

= [ [ 925.66 - 799] + 110 ] / 799

= [ [ 126.66] + 110 ] / 799

= [ 236.66] / 799

= 0.2962 i.e 29.62%


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