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

Solutions

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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