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31 March, 22:16

You buy a bond for $994 that has a coupon rate of 6.1% and a 5-year maturity. A year later, the bond price is $1,184. (Assume a face value of $1,000 and annual coupon payments.) a. What is the new yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Yield to maturity % b. What is your rate of return over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Rate of return %

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  1. 31 March, 22:39
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    a) YTM is 1.34%

    b) rate of return over the year = 25.25%

    Explanation:

    a) Given:

    Price of bond = $994

    Coupon rate = 6.1% or 0.061

    Face value (FV) = $1,000

    Coupon payments (pmt) = 1,000 * 0.061 = $61

    Maturity period = 5 years

    Price of bond after 1 year (PV) = $1,184

    So now period of bond (nper) = 4 years

    New Yield to maturity can be calculated using spreadsheet function = rate (nper, PV, FV)

    Yield to maturity (YTM) is 1.34%.

    PV is negative as it's a cash outflow

    b) Calculation of rate of return:

    Return after a year includes coupon payment and capital returns.

    Coupon payment = $61

    Capital return = Price of bond after a year - Initial price of bond

    = 1,184 - 994

    = $190

    Total returns = 61 + 190 = $251

    Rate of return = Total returns : Initial price of bond

    = 251 : 994

    = 0.25252 or 25.25%
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