Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a
ID: 2653680 • Letter: L
Question
Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 8%. After receiving the coupon, you sold the bond today for $930. What is your return rate in one year?
What is your return rate in one year? (Hint: find out how much did you pay for the bond last year?)
(Please Show Calculation and Work on the Financial Calculator which leads to the solution of the problem)
a) 18.28%
b) 2.75%
c) 5.68%
d) 6.64%
e) -2.11%
Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 8%. After receiving the coupon, you sold the bond today for $930. What is your return rate in one year?
Explanation / Answer
We need to find the Price at which Bonds were purchased.
Price of Bond one year before = 75 x PVAF(8%, 20years) + 1,000 x PVF(8%, 20years) = (75 x 9.818) + (1,000 x 0.215) = $950.91
Return rate in one year = (930 + 75 - 950.91) / 950.91 = 5.68%. Thus, Option C.
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