Question

You buy a bond for $985 that has a coupon rate of 5.50% and a maturity of 8-years. A year later, the bond price is $1,160. (Assume a face value of $1,000 and annual coupon payments.) What is your rate of return over the year?

Answer 1

$1051.51

Step-by-step explanation:

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Step-by-step explanation:

Coupon rate 10%

Face value = $1,000

Yield to maturity = 8%

Annual coupon will be:

= Face value × Coupon rate

= 1000 × 10%

= 100

Therefore, the price of bond will be:

= Annual coupon × Present value of annuity factor + $1000 × Present value of the discounting factor

= (100 x 2.5771) + (1000*0.7938)

= 257.71 +793.8

= $1051.51 =

The price of the bond is $1051.51