Question

You purchase a bond with 10% annual coupon rate and $1,000 face value. The bond has 4 years to maturity. You pay $951 for this bond, which means that this bond yields 11.6%. You decide to sell this bond in one year; right after the issuer makes a coupon payment. If the market interest rates at the time of sale have decreased to 6%p.a., what is your (nominal) realized rate of return

Answer 1

26.91%

Step-by-step explanation:

PMT = 10%*1000 = 100

FV = 1000

N = 3

I/Y = 6%

Using Ms Excel PV function

Price of the bond on sale = PV(PMT, FV, N. I/Y)

Price of the bond on sale = $1,106.92

Realized rate of return = (Sale price - Initial price+ Coupon)/ Initial price

Realized rate of return = ($1106.92 - $951 + $100) / $951

Realized rate of return = 0.269106204

Realized rate of return = 26.91%