Question

Last year Janet purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.01%. If Janet sold the bond today for $1,070.06, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The rate of return is as follows:

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

Purchase price is as follows:

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

= $ 1,000 x 11% x [ [ (1 - 1 / (1 + 0.1001)¹⁰ ] / 0.1001 ] + $ 1,000 / 1.1001¹⁰

= $ 110 x 6.141928365 + $ 385.1929707

= $ 675.6121202 + $ 385.1929707

= $ 1,060.805091

So, the return will be as follows:

= [ $ 1,070.06 - $ 1,060.805091 + $ 110 ] / $ 1,060.805091

= $ 119.2549092 / $ 1,060.805091

= 11.24%