Question

You buy a bond for $994 that has a coupon rate of 6.1% and a 5-year maturity. A year later, the bond price is $1,184. (Assume a face value of $1,000 and annual coupon payments.) a.What is the new yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Yield to maturity % b.What is your rate of return over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Rate of return %

Answer 1

a) YTM is 1.34%

b) rate of return over the year = 25.25%

Step-by-step explanation:

a) Given:

Price of bond = $994

Coupon rate = 6.1% or 0.061

Face value (FV)= $1,000

Coupon payments (pmt) = 1,000 × 0.061 = $61

Maturity period = 5 years

Price of bond after 1 year (PV) = $1,184

So now period of bond (nper) = 4 years

New Yield to maturity can be calculated using spreadsheet function =rate(nper,PV,FV)

Yield to maturity (YTM) is 1.34%.

PV is negative as it's a cash outflow

b) Calculation of rate of return:

Return after a year includes coupon payment and capital returns.

Coupon payment = $61

Capital return = Price of bond after a year - Initial price of bond

= 1,184 - 994

= $190

Total returns = 61 + 190 = $251

Rate of return = Total returns ÷ Initial price of bond

= 251 ÷ 994

= 0.25252 or 25.25%