Question

Sometimes bonds currently sell for ghs 1,150. they have a 6.75% annual coupon rate and a 15-year maturity and are callable in 6 years at ghs 1,067.50. assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the ytc or the ytm?

Answer 1

The rate of return should an investor expect to earn if he or she purchases these bonds is 4.81%

What is rate of return?

A return in finance is a profit on an investment. It includes any change in the investment's value and/or cash flows received by the investor, such as interest payments, coupons, cash dividends, stock dividends, or the payoff from a derivative or structured product.

Annual Rate of Return: Definition and Calculation

For example, if an investment is worth $70 at the end of the year and was purchased for $60 at the start of the year, the annual rate of return is 16.66%.

A good return on investment is generally thought to be around 7% per year. Based on the historical average return of the S&P 500 after correcting for inflation, this is the barometer that many investors utilize.

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