Calculate the rate of return and rate of capital gain for the following bonds given the...

Calculate the rate of return and rate of capital gain for the following bonds given the market interest rate of 9%:

Bond A: Matures in 7 years, offers a coupon rate of 12% and has a face value of $10,000

Bond B: Matures in 6 years, offers a coupon rate of 7% and has a face value of $7000

Solutions

Expert Solution

Purchase price of the bond has been found using the PV function in excel.

Purchase price of bond A =-PV(F10,F7,F11,F9,0) = 11509.89

Purchase price of bond B = -PV(L10.L7,L11,L9,0) = 6371.97

Negative sigh with pv function has been used to make pv value positive. This is done make calculations much easier.

Capital gain on bond A= F9-F12= -1509.89

Capital gain on bond B = L9-L12 = 628.03

ROR on bond A = (F11+F9-F12)/F12 = -2.69%

ROR on bond B = (L11+L9-L12)/L12 = 17.55%

Rahul Sunny answered 8 months ago

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