Question

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $94 and is selling at face value. what will be the rate of return on the bond if its yield to maturity at the end of the year is:

a. 6%
b. 9.4%
c. 11.4%

Answer 1

The rate of return on the bond is 0% for all three options.

Step-by-step explanation:

To calculate the rate of return on the bond, we need to use the formula for yield to maturity. The yield to maturity is the rate of return that the investor will earn if the bond is held until maturity. It takes into account the coupon payments and the difference between the price paid for the bond and the face value.

Let's calculate the rate of return for each option:

1. For a yield of 6%, the bond price would be $1,000, so the rate of return would be ($1,000 - $1,000)/$1,000 = 0%.
2. For a yield of 9.4%, the bond price would be $1,000, so the rate of return would be ($1,000 - $1,000)/$1,000 = 0%.
3. For a yield of 11.4%, the bond price would be $1,000, so the rate of return would be ($1,000 - $1,000)/$1,000 = 0%.

Based on these calculations, the rate of return on the bond is 0% for all three options.