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In: Finance

A bond has a face value of $1,000, a coupon of 5% paid annually, a maturity...

A bond has a face value of $1,000, a coupon of 5% paid annually, a maturity of 22 years, and a yield to maturity of 9%. (1) What is the bond price today and (2) what rate of return will be earned by an investor who purchases the bond today and holds it for 1 year if the bond’s yield to maturity at the end of the year is 6%?

A.$622.3 ; 41.79 %

B.$882.36 ; 41.79 %

C.$882.36 ; 49.82 %

D.$622.3 ; 49.82 %

Solutions

Expert Solution

1)

Computation Of Bond Price
a Annual Coupon Amount $                       50.00
($1000*5%)
b Present Value Annuity Factor for (22 Years,9%) 9.442425
c Present Value Of Annual Interest (a*b) $                    472.12
d Redemption Value $                 1,000.00
e Present Value Of (22 Years,9%) 0.15018
g Present Value Of Redemption Amount (d*e) $                    150.18
f Value   Of The Bond (c+g) $                    622.30

2)

Computation Of Bond Price After 1 Years
a Annual Coupon Amount $                       50.00
($1000*5%)
b Present Value Annuity Factor for (21 Years,6%) 11.764077
c Present Value Of Annual Interest (a*b) $                    588.20
d Redemption Value $                 1,000.00
e Present Value Of (21 Years,6%) 0.29416
g Present Value Of Redemption Amount (d*e) $                    294.16
f Value   Of The Bond (c+g) $                    882.36

Return on investment = (Sell [price - purchase price )+ coupon amount / purchase price

=[($882.36-622.30)+50]/622.30

=49.82%

Correct Option :D.$622.3 ; 49.82 %

jeff jeffy answered 1 year ago
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