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?

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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 ago

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