Question

A bond has a face value of $1,000, a coupon of 5% paid annually, a maturity of 34 years, and a yield to maturity of 8%. What rate of return will be earned by an investor who purchases the bond for $652.39 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.)

Answer 1

- 3.21%

Step-by-step explanation:

In this question, we use the PV formula which is shown in the spreadsheet.

The NPER represents the time period.

Given that,

Future value = $1,000

PMT = 1,000 × 5% = 50

NPER = 34 years - 1 year = 33 year

Rate of interest = 9%

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the present value would be $581.42

Now the return would be

= Sale price + interest - purchase price

= $581.42 + $50 - $652.39

= -$20.97

And, the total return would be

= Return ÷ purchase price

= -$20.97 ÷ $652.39

= - 3.21%