Question

A bond with a face value of $1,000 has 10 years until maturity, carries a coupon rate of 7.7%, and sells for $1,130. Interest is paid annually.

a. If the bond has a yield to maturity of 10.3% 1 year from now, what will its price be at that time? (Do not round intermediate calculations.)

b. What will be the annual rate of return on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. Now assume that interest is paid semiannually. What will be the annual rate of return on the bond?

Slightly greater than your part b answer

Slightly less than your part b answer

d. If the inflation rate during the year is 3%, what is the annual real rate of return on the bond? (Assume annual interest payments.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

a.

year remains in maturity after one year will be 9 year. Price of bond at 10.30% YTM after one year is calculated in excel and screen shot provided below:

Price of bond after one year will be $852.03.

b.

rate of return that is YTM of bond is calculated in excel and screen shot provided below:

rate of return that is YTM of bond is 5.94%.

c.

if interest is paid semiannually, that is interest is compound twice in a year, so nnual rate of return on the bond will be Slightly greater than 5.94%.

d.

if inflation rate = 3%

Real rate of retrn = [(1 + 5.94%) / (1 + 3%)] - 1

= 1.0285 - 1

= 2.85%

Real rate of return is 2.85%.