Question

An investor is considering the purchase of​ a(n) 7.625 %​, ​18-year corporate bond​ that's being priced to yield 9.625 %. She thinks that in a​ year, this bond will be priced in the market to yield 8.625 %. Using annual​ compounding, find the price of the bond today and in 1 year.​ Next, find the holding period return on this​ investment, assuming that the​ investor's expectations are borne out.

Answer 1

The correct answer is 18.84%.

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:

Time period ( Nper) = 18 years

Rate = 9.625%

Let FV = $1,000

Coupon rate = 7.625%

Then, Coupon payment = $1,000 × 7.625% = $76.25

Attachment is attached of financial calculator

So PV = $831.95

After 1 year

Time period (Nper) = 17 years

Rate = 8.625%

Payment = $76.25

Attachment is attached of financial calculator

So, Pv = $912.46

So, we can calculate the holding period return by using following formula:

Holding period return = Total return ÷ Investment × 100

= ( $912.46 + $76.25 - $831.95) ÷ $831.95 × 100

= 18.84%