Question

QUESTION 16

One year ago you purchased an 8% coupon rate bond when it was first issued and priced at its face value of $1,000. Yesterday the bond paid its second semi-annual coupon. The bond currently has 7 years left until maturity and has a yield to maturity of 6%. If you sell the bond today, what will your return have been from this investment during the year you held the bond and collected the coupon payments?


a. -10.6%


b. -1.9%


c. 8.0%


d. 19.3%


e. 32.2%

Answer 1

Correct answer > d. 19.30%

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First compute selling price of bond.

Bond value is computed below by formula and financial calculator both:

Using financial calculator BA II Plus - Input details:	#
I/Y = R = Rate or yield / frequency of coupon in a year = 6/2 =	3.000000
PMT = Coupon rate x FV / frequency = -8% x 1000/2	-$40.00
N = Number of years remaining x frequency = 7 x 2 =	14.00
FV = Future Value =	-$1,000.00
CPT > PV = Present value of bond = Price of Bond = Current value of bond =	$1,112.96
Formula for bond value: PV = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N) =
PV = (40* ((1-(1+0.03)^-14)/0.03) + 1000/(1+0.03)^14)	$1,112.96

Hence, Bond selling price = $1,112.96

Now,

Return on Bond = (Coupon earned for year + Bond selling price – Purchase price) / Purchase price

Return on Bond = (80 + $1,112.96 - 1000) / 1000

Return on bond = 19.30%