Question

last year you bought a bond for $1,050. it was a 20-year 7% coupon rate bond with a yield-to-maturity of 6.54%. its face value is $1,000. this year you want to sell the bond. bonds with similar maturity and risk profile now trade at a 7.5% yield-to-maturity. what is your one-year return from investing in this bond?

Answer 1

The one-year return from investing in this bond is -12.38%

Step-by-step explanation:

To calculate the one-year return from investing in this bond, we need to consider the interest payments and any capital gains. The bond has a face value of $1,000 and a coupon rate of 7%. So, the interest payments for the year would be $1,000 x 7% = $70.

To calculate the capital gain or loss, we compare the yield-to-maturity of the bond when it was bought with the current yield-to-maturity of similar bonds. The yield-to-maturity is the effective interest rate an investor will earn on a bond if held until maturity. In this case, the yield-to-maturity when bought was 6.54% and now it is 7.5%.

The capital gain or loss can be calculated as follows:

(($1,000 + $70) - $1,050) / $1,050 = -0.1238 or -12.38%

Therefore, the one-year return from investing in this bond is -12.38%.