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