Question

You buy a 12-year 5 percent annual coupon bond at par value, $1,000. You sell the bond three years later for $1,200. What is your rate of return over this three-year period?

Answer 1

Rate of ret is YTM.

YTM is the Rate at which PV of Cash Inflows are equal to Bond Price.

Year	CF	PVF @8%	Disc CF	PVF @9%	Disc CF
0	$ -1,000.00	1.0000	$ -1,000.00	1.0000	$ -1,000.00
1	$        50.00	0.9259	$        46.30	0.9174	$        45.87
2	$        50.00	0.8573	$        42.87	0.8417	$        42.08
3	$        50.00	0.7938	$        39.69	0.7722	$        38.61
4	$        50.00	0.7350	$        36.75	0.7084	$        35.42
5	$        50.00	0.6806	$        34.03	0.6499	$        32.50
5	$ 1,200.00	0.6806	$     816.70	0.6499	$     779.92
NPV			$        16.34		$      -25.60

Rate of Ret = rate at which least +ve NPV + [ NPV at that rate/ change in NPV due to 1% inc in Rate ] * 1%

= 8% + [ 16.34 / 41.94 ] * 1%

= 8% + 0.39%

= 8.39%