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A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity...

A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity of 28 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 7%?

a) $640.4 ; 29.58 %

b) $640.4 ; 37.68 %

c) $494.19 ; 29.58 %

d) $494.19 ; 37.68 %

Solutions

Expert Solution

1)

Computation Of Bond Price
a Annual Coupon Amount $                       40.00
($1000*4%)
b Present Value Annuity Factor for (28 Years,9%) 10.116128
c Present Value Of Annual Interest (a*b) $                    404.65
d Redemption Value $                 1,000.00
e Present Value Of (28 Years,9%) 0.08955
g Present Value Of Redemption Amount (d*e) $                       89.55
f Value   Of The Bond (c+g) $                    494.19
Computation Of Bond Price After 1 Year
a Annual Coupon Amount $                       40.00
($1000*4%)
b Present Value Annuity Factor for (27 Years,7%) 11.986709
c Present Value Of Annual Interest (a*b) $                    479.47
d Redemption Value $                 1,000.00
e Present Value Of (27 Years,7%) 0.16093
g Present Value Of Redemption Amount (d*e) $                    160.93
f Value   Of The Bond (c+g) $                    640.40

Rate of interest earned = [(sale price- purchase price)+ interest ]/ purchase price

=[($640.40-494.19)+$40]/494.19

=37.68%

Correct Option =d) $494.19 ; 37.68 %

jeff jeffy answered 1 year ago
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