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

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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%

jeff jeffy answered 1 year ago

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