55.8k views
4 votes
Suppose that, after one year, the yield to maturity on all bonds is 5%. What is the profit or loss in dollars at this time

User Zanderi
by
4.4k points

1 Answer

0 votes

Answer:

The question is incomplete, so I looked for similar questions. I found the following information:

  • you purchased bonds with a 6% coupon rate, that yield 7% and 10 years to maturity

First we must determine the price of the bonds when you purchased them:

PV of face value = $1,000 / (1 + 7%)¹⁰ = $508.35

PV of coupon payments = $60 x 7.0236 PV annuity factor, 7%, 10 periods) = $421.42

market price = $508.35 + $421.42 = $929.77

after 1 year, you received $60 (coupon)

the market price of the bond:

PV of face value = $1,000 / (1 + 5%)⁹ = $644.61

PV of coupon payments = $60 x 7.1078 (PV annuity factor, 5%, 9 periods) = $426.47

market price = $644.61 + $426.47 = $1,071.08

total gain = $60 + ($1,071.08 - $929.77) = $201.31

rate of return = $201.31 / $929.77 = 21.65%

User Jbehren
by
4.4k points