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Last year Janet purchased a $1,000 face value corporate bondwith a 12% annual coupon rate...

Last year Janet purchased a $1,000 face value corporate bond with a 12% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 13.15%. If Janet sold the bond today for $990.77, 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

The rate of return is computed as follows:

= (Selling price + Purchase price + Coupon payment) / Purchase price

Purchase price is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)n ] / r ] + Par value / (1 + r)n

= $ 1,000 x 12% x [ [ (1 - 1 / (1 + 0.1315)25 ] / 0.1315 ] + $ 1,000 / 1.131525

= $ 120 x 7.258057112 + $ 45.56548977

= $ 916.5323432

So, the return will be as follows:

= [ $ 990.77 - $ 916.5323432 + $ 120 ] / $ 916.5323432

= $ 194.2376568 / $ 916.5323432

= 21.19%

jeff jeffy answered 2 years ago
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