You buy a bond for S970 that has a coupon rate of 7.0% and a 9-year maturity. A

Question

You buy a bond for S970 that has a coupon rate of 7.0% and a 9-year maturity. A year later, the bond price is $1,120. (Assume a face value of $1,000 and annual coupon payments.) a. 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 b What is you rate of return over thae ya o not round intermediate calculations Enter your answer as a percent rounded to 2 decimal places Rate of return

Explanation / Answer

Ans:

Step-1:

Calculation of yield to maturity:

Face value = $1,000

Current market price = $1,120

Coupon rate = 7%

Maturity period = 9years

Formula:

YTM = Annual interest + Par value – market value / no of years to maturity / Par value + Market value / 2

Yield to maturity = 5.29%

Calculation of rate of return:

= interest earned / amount invested

= $150 / $970 = 15.46%

Step-2:

Each with face value = $2.65 million

Total asset worth = $4.30 million for both

B face value – asset worth

= $2.65 - $2.15

= 0.5 million

Step-3:

Calculate expected rate of return:

= stock price = 20 per share

Dividend per share = 2

= growth rate = 6%

= 16%

Calculate stock price:

= Rate of return * dividend per share

= 18.5% * 2

= 37

Step-4:

Calculate expected growth rate:

Sell share = $80

Dividend per share = $4

Expected rate of return = 15%

= $80 / 4 * 15%

= 3%

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