Question

You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. Suppose you decided sell the bond after receiving the first interest payment and the bond's yield to maturity had just changed to 3% , what would your annual total rate of return on holding the bond for that year have been approximately?

Answer 1

Bond purchase price

Face value (FV) = $1,000

Coupon rate = 6.00%

Number of compounding periods per year = 1

Interest per period (PMT) = 60.00

Number of years to maturity = 5

Number of compounding periods till maturity (NPER) = 5

Market rate of return/Required rate of return = 4.00%

Market rate of return/Required rate of return per period (RATE) = 4.00%

Bond price = PV(RATE,NPER,PMT,FV)

Bond price = $1,089.04

Bond selling price:

Face value (FV) = $1,000

Coupon rate = 6.00%

Number of compounding periods per year = 1

Interest per period (PMT) = $60.00

Number of years to maturity = 4

Number of compounding periods till maturity (NPER) = 4

Market rate of return/Required rate of return = 3.00%

Market rate of return/Required rate of return per period (RATE) = 3.00%

Bond price = PV(RATE,NPER,PMT,FV)

Bond price = $1,111.51

Return during one year = Bond selling price - Bond purchase price + Interest per period) / Bond purchase price

Return during one year = ($1,111.51 - $1,089.04 + $60) / $1,089.04

Return during one year = $82.47 / $1,089.04

Return during one year = 0.075727246

Return during one year = 7.57%