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Homework answers / question archive / You purchased a 60-year annual-interest coupon bond 2 year ago

You purchased a 60-year annual-interest coupon bond 2 year ago

Finance

You purchased a 60-year annual-interest coupon bond 2 year ago. Its coupon interest rate was 9%, and its par value was $1000. At the time you purchased the bond, the yield to maturity was 9%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 8%, your annual total rate of return on holding the bond for that year would have been approximately

 

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First, we calculate Purchase Price of Bond using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Purchase Price of Bond = ?

Rate = Yield to Maturity = 9%

Nper = Number of Periods = 60 years

PMT = Coupon Payment = $1000*9% = $90

FV = Par Value = $1,000

Substituting the values in formula:

=-pv(9%,60,90,1000)

PV or Purchase Price of Bond = $1,000

So, Purchase Price of Bond is $1,000.

 

 

Now we calculate Sales Price of Bond using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Sales Price of Bond = ?

Rate = Yield to Maturity = 8%

Nper = Number of Periods = 60 - 2 years = 58 years 

PMT = Coupon Payment = $1000*9% = $90

FV = Par Value = $1,000

Substituting the values in formula:

=-pv(8%,58,90,1000)

PV or Sales Price of Bond = $1,123.56

So, Sales Price of Bond is $1,123.56.

 

Total Return = (Final Price - Purchase Price + Coupon)/Purchase Price

Total Return = (1123.56 - 1000 + 90)/1000

Total return = 21.36%

 

 

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