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What is the expected rate of return of the following bonds? Par value: $1,000 Years to maturity: 10 years Coupon rate: 8% paid semiannually Current market price: $960
What is the expected rate of return of the following bonds?
Par value: $1,000
Years to maturity: 10 years
Coupon rate: 8% paid semiannually
Current market price: $960
Expert Solution
We can calculate the expected rate of return using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Expected rate of return (semiannual)
Nper = 10*2 = 20 periods (semiannual)
Pmt = Coupon payment = $1,000*8%/2 = $40
PV = $960
FV = $1,000
Substituting the values in formula:
= rate(20,40,-960,1000)
= 4.30%
Expected rate of return = Rate * 2
= 4.30% * 2
= 8.60%
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