Answer:
50.34%
Explanation:
initial investment = $1,000 (bond purchased at par value)
annual coupon = $1,000 x 9% = $90
period cash flow
year 0 -$1,000
year 1 $90
year 2 $90 + ($90 x 0.094) = $98.46
year 3 $90 + ($188.46 x 0.094) = $107.71524
year 4 $90 + ($296.17524 x 0.094) = $117.84
year 5 $90 + ($414.02 x 0.094) = $128.92
at the end of year 5, the investor will have $542.94, plus he/she will still own the bond
the price of the bond at year 5 will be:
0.112 = {90 + [(1,000 - MV)/2]} / [(1,000 + MV)/2]
0.112 x [(1,000 + MV)/2] = 90 + [(1,000 - MV)/2]
0.112 x (500 + 0.5MV) = 90 + 500 - 0.5MV
56 + 0.056MV = 590 - 0.5MV
0.556MV = 534
MV = 534 / 0.556 = $960.43
the investor's total return = [($542.94 + $960.43) / $1,000] - 1 = ($1,503.37 / $1,000) - 1 = 0.50337 x 100 = 50.34%
