Three years ago, you purchased a 30 year, $1,000 par value bond for a quoted price...

Three years ago, you purchased a 30 year, $1,000 par value bond for a quoted price of 95.0. The bond pays its 5% coupon semi-annually.

If the present market rate on identical bonds is 4%, at what price should the bond trade today?
If you sell your bond today for the price you calculated above, what is your EFFECTIVE ANNUAL HOLDING PERIOD RETURN over the 3-year period?

Expert Solution

a	Given:
	30 year bond is purchased 3 years ago at qouted price of 95, having Coupon 5%, semiannually

	We have to calculate current trading price if interest rate today is 4%, semiannually

	PV	?
Set	N	54	(27 Yrs x 2)
	PMT	25	($1000 x 5%/2)
	I/Y	2%	(4%/2)
	FV	1,000
Press CPT + PV	PV	($1,164.19)	Bond should trade today at $1,164.19
		=PV(2%,54,25,1000)

b	Our purchase price (P0)		950	(1000 x 95%)
	Our sale price (P1)		1164.19	as above calculated

	Interest income (I)		150	(25 x 6)
	n = 3

	Effective annual HPR = (1+(P1-P0+I)/P0)^(1/n)-1
		(1+(1164.19-950+150)/950)^(1/3)-1
		11.42%

jeff jeffy answered 1 year ago

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