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In: Finance

Last year, Joan purchased a $1,000 face value corporate bond with an 9% annual coupon rate...

Last year, Joan purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 13.84%. If Joan sold the bond today for $964.28, what rate of return would she have earned for the past year? Round your answer to two decimal places.

Solutions

Expert Solution

Price of bond = PV of all interest payment+PV of redemption value
= [Coupon * PVAF (YTM,time to maturity)]+[PVF(YTM,time) *redemption value]
Price of bond when purchased
Coupon = $1000*9%*=$90
Time = 25
YTM = 14%
Redemption value = $1,000
Price = [$90*PVAF(13.84%,25)]+[PVF(13.84%,25)*$1000]
= [$30*7.4859]+[0.039141*$1,000)
= $624.84+$39.14
= $                       663.98
Return on bond = [(Coupon+sale price-purchase price)/purchase price]
= [($90+$964.28-$663.98)/$663.98]*100
= ($390.3/$663.98)*100
= 0.5878 or 58.78%
There may be little difference due to deciml places.
If youhave anu doubt,please ask
Please upvote the answer

jeff jeffy answered 2 years ago
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