Question

Last year Janet purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.17%. If Janet sold the bond today for $1,101.03, what rate of return would she have earned for the past year

Answer 1

28.26%

Step-by-step explanation:

The rate of return earned by the bond investor could be determined using holding period formula given thus:

Holding period return=P1-Po+C/Po

P1 is the price of the bond now which is $1,101.03

Po is the original purchase price ,which can be computed using pv formula in excel as below:

=-pv(rate,nper,pmt,fv)

rate is the yield of 10.17%

nper is the duration for which the coupon would be paid which is 10 years

pmt is the annual coupon=$1000*9%=$90

fv is the face value of $1000

=-pv(10.17%,10,90,1000)=$ 928.63

C is the annual coupon of $90 received over one year

Holding period return=($1,101.03-$928.63+$90)/$928.63 =28.26%