Question

In: Finance

suppose you buy 1000 par value bond that matures in 15 years andpays an annual...

suppose you buy 1000 par value bond that matures in 15 years and pays an annual coupon rate of 6% for a price of 965.38 if you hold the bond for 1 year and sell it when it's yield to maturity is 7.5% what is your one year return

Expert Solution

- Par Value of Bond = $1000

Annual Coupon Payment = $1000*6%

= $60

Bond Purchased at price= $965.38

- You sell the bond 1 year after the purchase when Yield to maturity(YTM) is 7.5%

No of years to maturity left(n) = 15 years - 1 years

= 14 years

Calculating the selling price of bond:-

Price = $509.352 + $363.31

Selling price of Bond = $872.66

Now, Calculating the one year return:-

Return = [(Sell Price - Buy Price) + Coupon Received]/Buy Price

=[($872.66 - 965.38) + $60]/$965.38

= -3.39%

So, one year return is -3.39%

jeff jeffy answered 2 years ago

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