Question

Suppose you purchase a​ 10-year bond with 6.9% annual coupons. You hold the bond for four​ years, and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 5.4% when you purchased and sold the​ bond. what is the annual rate of return of your​ investment?

Answer 1

  

_______________________________

_______________________________

Purcahse Price

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.4%

And n is the no of Compounding periods 10 years

Coupon 6.9%

=

= 1113.61

Value after 4 years

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.4%

And n is the no of Compounding periods 6 years

Coupon 6.9%

=

= 1075.17

Holding Period Return = Coupon + Capital Gain / Purchase Price

= 69 * 4 + (1075.17 - 1113.61) / 1113.61

= 237.56 / 1113.61

= 21.332423379

Annual return = ((1+0.21332423379)^(1/4)) - 1

= 4.95%

NOTE: Do upvote the answer, if this was helpful.

NOTE: Please don't downvote directly. In case of query, I will solve it in comment section in no time.