Question

In: Finance

One year ago you purchased a 8-year, 8% coupon bond. Today, you sold the bond at...

One year ago you purchased a 8-year, 8% coupon bond. Today, you sold the bond at a YTM of 8%. If the current yield was 6.96%, what was your total return on this investment?

Par value is $1000

Solutions

Expert Solution

Coupon = Par Value*Coupon Rate = 1000*8% = $80

Period Cash Flow Discounting Factor
[1/(1.0696^year)]
PV of Cash Flows
(cash flows*discounting factor)
1 80 0.934928945 74.79431563
2 80 0.874092133 69.92737064
3 80 0.817214036 65.37712288
4 80 0.764037057 61.12296455
5 80 0.71432036 57.14562879
6 80 0.667838781 53.42710246
7 80 0.624381807 49.95054455
8 80 0.583752624 46.70020994
8 1000 0.583752624 583.7526243
Price of the Bond 1 year ago =
Sum of PVs
1062.197884
Period Cash Flow Discounting Factor
[1/(1.08^year)]
PV of Cash Flows
(cash flows*discounting factor)
1 80 0.925925926 74.07407407
2 80 0.85733882 68.58710562
3 80 0.793832241 63.50657928
4 80 0.735029853 58.80238822
5 80 0.680583197 54.44665576
6 80 0.630169627 50.41357015
7 80 0.583490395 46.67923162
7 1000 0.583490395 583.4903953
Price of the Bond today =
Sum of PVs
1000

Total Return on Investment = [Selling Price-Purchase Price+Coupon Received]/Purchase Price = [1000-1062.2+80]/1062.2 = 17.8/1062.2 = 0.01675767 = 1.675767%


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