You buy a bond for $958 that has a coupon rate of 6.2% and a 5-year maturity. A

Question

You buy a bond for $958 that has a coupon rate of 6.2% and a 5-year maturity. A year later, the bond price is $1,088 (Assume a face value of $1,000 and annual coupon payments.) What is the new yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Yield to maturity % What is your rate of return over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Rate of return %

Explanation / Answer

Answer:a

At a price of $1,088 and remaining maturity of 4 years, find the bond’s yield to maturity by solving for r in the following equation:

1088=$62*PVIFA(r%,4)+$1000*PVIF(r%,4)

r= 3.79%

Using a financial calculator, enter

n= 4, PV = 1,088, FV = 1,000, PMT = 62; then compute

i= 3.79%.

Answer:b Rate of return=[(Coupons received + Capital Gain)/Initial Investment ]*100
=[[62 + (1088-958) ] / 958 ]*100
= 20.04%

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