You have purchased a 5-year bond with coupon 4.42% and face value of 1.000 euros at...

You have purchased a 5-year bond with coupon 4.42% and face value of 1.000 euros at a discount yield of 4.65%. What total return will you make if you sell the bond two years later when the discount yield has been changed to 4.20%?

Expert Solution

Purchase price of bonds is:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (4.65%,5 periods)	$ 44.20	4.37169	$ 193.23
Present value of bond face amount -Present value (4.65%,5 periods)	$ 1,000.00	0.79672	$ 796.72

Bond price			$ 989.95

Bond selling price is:

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (4.2%,3 periods)	$ 44.20	2.76459	$ 122.19
Present value of bond face amount -Present value (4.2%,3 periods)	$ 1,000.00	0.88389	$ 883.89

Bond price			$ 1,006.08

Annual coupons received for two years = 44.2

Total return is:

Calculator
Inputs:
PV	(989.95)
PMT	44.2
FV	1,006.08
N	2

Output:
I/Y = IRR=	5.26%

Total return on holding bonds for two years is 5.26%

jeff jeffy answered 2 years ago

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You have purchased a 5-year bond with coupon 4.42% and face value of 1.000 euros at...

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