Question

In: Finance

You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase.

You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase. The coupon interest rate is 10% and par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been a. 7.00%. b. 8.00%. c. 9.95%. d. 11.95%. e. none of the above

Solutions

Expert Solution

Annual coupon = 10% of 1000 = $100

Now after 1st year no. of years left = 6-1 = 5 years. Let us now determine the price at which you sold the bond. The price will be = present value of 5 coupon payments of $100 each + present value of maturity value of $1,000. The applicable discount rate = current YTM = 7%.

Thus value of the bond = PV (7%, 5, 100, 1000) = $1,123.01

Now price at which the bond was bought = PV (8%, 6, 100, 1000) = $1,092.46

Annual rate of return from holding the bond = (annual coupon + price at which bond was sold - price at which bond was bought)/price at which bond was bought

= (100 + 1123.01 - 1092.46)/1092.46

= 11.95%

Thus the answer is option "d" i.e. 11.95%

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

You purchased an annual interest coupon bond one year ago with six years remaining to maturity...
You purchased an annual interest coupon bond one year ago with six years remaining to maturity at the time of purchase. The coupon interest rate is 10% and the par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7% at the time of sale, your annual total rate of return on holding...
4 years ago you purchased a 12 year maturity, 4.7% coupon annual pay bond at a...
4 years ago you purchased a 12 year maturity, 4.7% coupon annual pay bond at a price of $90 per $100 of face value. Shortly after you purchased the bond, yields changed to 4.08%. If you sell the bond today at a price of $106 per $100 of face value, what is your annualized holding period return?
Suppose you purchase a 20 year treasury bond with a? 6% annual coupon ten years ago...
Suppose you purchase a 20 year treasury bond with a? 6% annual coupon ten years ago at par. Today the? bond's yield to maturity has risen to? 8% (EAR). If you sell this bond? now, the internal rate of return you will earn on your investment will be closest? to: A.) 5.0 B.) 6.0 C.) 4.9 D.) 8.0
Suppose you purchase a 20-year treasury bond with a 6% annual coupon ten years ago at...
Suppose you purchase a 20-year treasury bond with a 6% annual coupon ten years ago at par. Today the bond's yield to maturity has risen to 8% (EAR). - If you hold this bond to maturity, the internal rate of return you will earn on your investment will be closest to: A) 5.0%. B) 5.6%. C) 6.0%. D) 8.0%. E)  9.0% - If you sell this bond now, the internal rate of return you will earn on your investment will be...
Three years ago, you bought an 8% coupon bond with a 9-year remaining maturity for $936....
Three years ago, you bought an 8% coupon bond with a 9-year remaining maturity for $936. Today you sold the bond for $1,069. Given that the bond paid coupons semiannually, what was your effective annual rate of return on this investment?
If you purchase a $1,000 face value, 4% annual coupon bond with 6 years to maturity...
If you purchase a $1,000 face value, 4% annual coupon bond with 6 years to maturity when the going interest rate (or yield) is 3%, then you would pay $1,054.17 for the bond. a) What is your expected rate of return on the bond assuming interest rates do not change and you hold the bond to maturity? b) Suppose that you sell it a year later at which time the going interest rate has risen to 3.5%. What is your...
A 6% annual coupon bond has 11 years remaining until maturity. Par value is $1000. The...
A 6% annual coupon bond has 11 years remaining until maturity. Par value is $1000. The required rate of return (yield to maturity)on the bond is 8.5%. Compute the price of the bond today using the appropriate Excel formula Compute the price of the same bond if it has 10 years remaining to maturity instead of 11. What is the capital gains yield on the bond? What is the current yield on the bond? What is the total yield on...
Two years ago, you bought a 10-year, 6% annual coupon payment bond when its yield-to-maturity was...
Two years ago, you bought a 10-year, 6% annual coupon payment bond when its yield-to-maturity was 8%. Right after you purchased this bond, the yield-to-maturity on this bond increased to 9% and stayed at the same level in the next two years. You reinvested the coupon payments at the market rate of 9%. You just sold the bond at 9% yield-to-maturity. What is your annualized holding period return? What is your capital gain/loss? Note: Remember that capital gains/losses are computed...
Two years ago, you bought a 10-year, 6% annual coupon payment bond when its yield-to-maturity was...
Two years ago, you bought a 10-year, 6% annual coupon payment bond when its yield-to-maturity was 8%. Right after you purchased this bond, the yield-to-maturity on this bond increased to 9% and stayed at the same level in the next two years. You reinvested the coupon payments at the market rate of 9%. You just sold the bond at 9% yield-to-maturity. 1) What is your annualized holding period return? 2) What is your capital gain/loss?
Three years ago you purchased a 15-year $1,000 bond with a coupon rate of 6 percent....
Three years ago you purchased a 15-year $1,000 bond with a coupon rate of 6 percent. You now wish to sell the bond and read that yields are 10 percent. What price should you receive for the bond? a $727.45 b $1,037.20 c $912.55 d $1,135.35
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT