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Assume that you buy a default free government bond with a coupon rate of 2% and...

Assume that you buy a default free government bond with a coupon rate of 2% and a maturity of 20 years, at face value. Assuming that interest rates increase to 3% over the course of the year following your purchase. What will your return on the government bond be for that year? Can you please tell me how to solve this using financial calculator

Solutions

Expert Solution

purchase price=1000

use financial calculator as below

FV=1000

PMT=1000*2%=20

N=19 (this is after 1 year)

I/Y=3

Click CPT

Click PV=856.76 is the value of bond after 1 year

What will your return on the government bond be for that year=(1000*2%+856.76-1000)/1000=-12.32%

jeff jeffy answered 2 years ago
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