Question

One year ago, you purchased an 8% coupon rate bond when it was first issued and priced at its face value of $1,000. Yesterday the bond paid its second semi-annual coupon. The bond currently has 7 years left until maturity and has a yield to maturity of 12%.

Required:
1. If you sell the bond today, what will your return have been from this investment during the year you held the bond and collected the coupon payments?

Answer 1

The rate of return -10.59%

Step-by-step explanation:

In selling the bond today it would be necessary to determine its fair price today using the present value formula in excel:

=pv(rate,nper,pmt,fv)

rate is semi-annual yield on the bond 6%(12%/2)

nper is the number of interest the bond would pay more before maturity,which is 7 years multiplied by 2=14

pmt is the semi-annual interest payable which is 8%/2*$1000=$40

fv is the face value of $1000

=-pv(6%,14,40,1000)

pv=$814.10

The rate of return =price today+coupon interest/initial price

price today is $814.10

coupon interest for one year=8%*1000=$80

fv is $1000

rate of return =($814.10-$1000 +$80)/$1000

=-10.59%