Question

Last year Janet purchased a $1,000 face value corporate bond with a 12% annual coupon rate and a 30-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.32%. If Janet sold the bond today for $920.86, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places..

Answer 1

Given that last year Janet purchased a bond,

Face value = $1000

coupon rate = 12% paid annually,

yearws to maturity = 30 years

Yield to maturity = 12.32%

So, annual coupon paymeny = 12% of 1000 = $120

So, purchase price of the bond can be calculated on financial calculator using following values:

FV = 1000

PMT = 120

N = 30

I/Y = 12.32

compute for Pv, we get PV = -974.82

So, purchase price of the bond = $974.82

selling price = $920.86

So, rate of return earned over the year = (Selling price - purchase prie+ coupon)/purchase price

=> rate of return = (920.86 - 974.82 + 120)/974.82 = 6.77%

So, rate of return Janet earned over the past year is 6.77%