Last year Janet purchased a $1,000 face value corporate bond with a 9% annual coupon rate...

Last year Janet purchased a $1,000 face value corporate bond with a 9% annual coupon rate and a 30-year maturity. At the time of the purchase, it had an expected yield to maturity of 8.85%. If Janet sold the bond today for $960.01, 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

Answer : Calculation of Price of Bond at the time of Purchase :

Price of Bond = [Coupon * PVAF @yield to maturity for n years] + [Face Value * PVF @YTM% for nth year]

where

yield to maturity is 8.85%

n is the number of years to maturity i.e 30

Price of Bond = [90 * PVAF @8.85% for 30 years] + [1000 * PVF @8.85% for 30th year]

= [90 * 10.4118627516] + [1000 * 0.07855014633]

= 1015.62

Rate of return = [Sale value + Coupon - Purchase price] / Purchase Price

= [960.01 + 90 - 1015.62] / 1015.62

= 34.39 / 1015.62

= 3.39%

jeff jeffy answered 2 years ago

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