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A bond is issued with a coupon of 4% paid annually, a maturity of 39 years,...

A bond is issued with a coupon of 4% paid annually, a maturity of 39 years, and a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the bond for $602.05 and holds it for 1 year if the bond’s yield to maturity at the end of the year is 9%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.)

Solutions

Expert Solution

Step 1) Calculate the purchase price:

r = YTM, FV = face value, n = time to maturity

This is the same as the given price

Step 2)Calculate the sale price after 1 year:

As after 1 year only 38 years are left to maturity, the formula is adjusted accordingly

Step 3 Calculate the return:

jeff jeffy answered 2 years ago
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