Question

A 6.70 percent coupon bond with 24 years left to maturity is priced to offer a 5.8 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.3 percent. What would be the total return of the bond in dollars? (Assume interest payments are semiannual.) What would be the total return of the bond in percent? (Assume interest payments are semiannual.)

Answer 1

current price

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =24x2

Bond Price =∑ [(6.7*1000/200)/(1 + 5.8/200)^k]     +   1000/(1 + 5.8/200)^24x2

k=1

Bond Price = 1115.83

price in one year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =23x2

Bond Price =∑ [(6.3*1000/200)/(1 + 5.8/200)^k]     +   1000/(1 + 5.8/200)^23x2

k=1

Bond Price = 1063.06

dollar return

=(price in one yea +coupon-price today)

=(1063.06+63-1115.83)=10.23

%age return

=dollar return/price today

=10.23/1115.83 = 0.9168%