In: Finance
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
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%