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In: Finance

Last year Janet purchased a $1,000 face value corporate bondwith an 7% annual coupon rate...

Last year Janet purchased a $1,000 face value corporate bond with an 7% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 6.4%. If Janet sold the bond today for $1,138.99, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

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Expert Solution

Information provided:

Face value = Future value= $1,000

Time= 10 years

Coupon rate = 7%

Coupon payment = 0.07*$1,000 = $70

Yield to maturity= 6.4%

The question is solved by first calculating the purchase price.

The purchase price is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

I/Y= 6.4

PMT= 70

Press the CPT key and PV to calculate the present value.

The value obtained is 1,043.34.

                                                                                                           

Therefore, the purchase price is $1,043.34.

Rate of return = (Selling price - Purchase price + Coupon payment) / Purchase price

= ($1,138.99 - $1,043.34 + $70) / $1,043.34

= $95.65 / $1,043.34*100

= 0.0917*100

= 9.17%

jeff jeffy answered 2 years ago
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