Question

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $104 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is: (Do not round intermediate calculations.

Answer 1

a. 6% b. 10.40%

a. Bond price at the end of year at 6% = 104 + 1,000 / (1 + 6%) = 1104/1.06 = $1,041.51

Rate of return = (1,041.51 + 104 - 1,000) / 1,000 = 145.51/1,000 = 0.14551 = 14.55%

b. Bond price at the end of year at 10.40% = 104 + 1,000 / (1 + 10.4%) = 1104/1.104 = $1,000

Rate of return = (1,000 + 104 - 1,000) / 1,000 = 104/1,000 = 0.104 = 10.40%