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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 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.91%. If Janet sold the bond today for $992.29, 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 that she earned for the past year 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 + 0.1091)15 ] / 0.1091 ] + $ 1,000 / 1.109115

= $ 120 x 7.226738261 + $ 211.5628557

= $ 1,078.771447

So, the return will be as follows:

= [ $ 992.29 - $ 1,078.771447 + $ 120 ] / $ 1,078.771447

= $ 33.51855295 / $ 1,078.771447

= 3.11%

jeff jeffy answered 2 years ago
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