Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate...

Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 13.17%. If Janet sold the bond today for $1,170.06, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

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Expert Solution

Bond Price whn it is purchased:

Bond Price:
It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. There is inverse relation between Bond price and YTM ( Discount rate ) and Direct relation between Cash flow ( Coupon/ maturity Value ) and bond Price.

Price of Bond = PV of CFs from it.

Year	Cash Flow	PVF/ PVAF @13.17 %	Disc CF
1 - 25	$ 70.00	7.2486	$ 507.40
25	$ 1,000.00	0.0454	$ 45.36
Bond Price			$ 552.76

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.

What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods

Holding period Ret = [ Sale Price - Purchase Price + Coupon ] / Purchase Price

= [ $ 1170.06 - $ 552.76 + $ 70 ] / $ 552.76

= $ 687.30 / $ 552.76

= 1.2434 I.e 124.34%

Holding period ret is 124.34%

jeff jeffy answered 1 year ago

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