Question

Four years ago, Lisa Stills bought six-year, 13.68 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $913.73, what will be her realized yield on the bonds? Assume similar coupon-paying bonds make annual coupon payments. (Round answer to 2 decimal places, e.g. 15.25%.) Realised rate of return %

Answer 1

10.60%

Step-by-step explanation:

First, we calcualte the returns and then solve for the rate like a normal compounding:

returns:

annual coupon payment. 1,000 face value x $ 13.68 = $ 136.80

sales price: 913.73

total: 136.8 x 6 + 913.73 = 820.80 + 913.73 =

cost: 947.68

to record the effective rate of return:

`947.64 (1+ r_e)^6 = 1,734.5\\`

`\sqrt[6]{(1,734.5)/(947.68)} -1 = r_e`

effective rate of return: 0.105992287 = 10.60%