Question
In: Finance
Last year, Sally purchased a $1,000 face value corporate bondwith an 11.8 percent annual coupon...
Last year, Sally purchased a $1,000 face value corporate bond with an 11.8 percent annual coupon rate and a 17-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.1 percent. If Sally sold the bond today for $1,271.32, what rate of return would she have earned for the past year?
Solutions
Expert Solution
Information provided:
Face value = Future value= $1,000
Coupon rate = 11.8%
Coupon payment = 0.118*$1,000 = $118
Yield to maturity= 9.1%
Time= 17 years
The purchase price of the bond is computed first. It is calculated by computing the present value.
The present value is calculated by entering the below in a financial calculator:
FV= 1,000
I/Y= 9.1
N= 17
PMT= 118
Press the CPT key and PV to compute the present value.
The value obtained is 1,229.20.
Therefore, the purchase price of the bond is $1,229.20.
Rate of return is calculated using the below formula:
Rate of return = Selling price - Purchase price / Purchase price *100
= 1,271.32 - $1,229.20 / $1,229.20*100
= $42.12 / $1,229.20*100
= 0.0343*100
= 3.43%.
jeff jeffy answered 2 years agoRelated Solutions
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