Question

If there is a 5 year bond with 10% coupon rate, which was purchased at $980 and sold at $1020 by end of year 4, what is the investor's yearly rate of return? How does it compare to coupon rate and YTM?

Answer 1

Answer:

14%

Explanation:

Rate of return = Coupon + (Selling price - face value) / face value

Rate of return  = $98 + ($1,020 - $980) / $ 980

                           = 0.14

                            = 14%

YTM = [C + (F - P) / n] ] / [(F + P) / 2 ]

Where:

• C = Coupon
• F = Face Value
• P = Selling Price
• n = Years to Maturity.

YTM = [$98 + ($980 - $1020) / 5] ] / [($980 + $1020) / 2 ]

       = 0.09

       = 9%

Thus, the yearly rate of return (14%) is higher than the coupon rate (10%), and the YTM (9%).