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You purchased a bond that pays 5
You purchased a bond that pays 5.50% coupon annually, 4 years ago for $930. Today these bonds are selling for $1100. If you sold the bond today, what is your annual rate of return on the investment if all coupons you received were reinvested in your bank account at 2.80% per annum?
Expert Solution
Computation of the annual rate of return:-
Annual rate of return = ((1100+229.41)/930)^(1/4)-1
= 1.42948^(1/4)-1
= 1.0934 - 1
= 9.34%
Working note:
We can calculate the future value by using the following formula in excel:-
=fv(rate,nper,-pmt,pv)
Here,
FV = Future value
Rate = 2.80%
Nper = 4 periods
Pmt = Coupon payment = $1,000*5.50% = $55
PV = $0
Substituting the values in formula:
= fv(2.80%,4,-55,0)
= $229.41
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