Question

You purchased an annual interest coupon bond one year ago that had six years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

Answer 1

Answer:

The correct answer to the following question will be "8%".

Explanation:

The given values are:

Number of years of maturity = 5 years

Interest rate of coupon = 10%

                           = 10%×1000

                           = 100

Yield to maturity, YTM = 8%

As we know,

Price of Bond = PV of Coupons + PV of Per Value

On putting the values in the above formula, we get

⇒                     = $\frac{100\times (1-(1+8 \ percent^{-5}))}{8 \ percent} +\frac{1000}{1+8 \ percent^{5}}$

⇒                     = $1079.85$

After 1 years, we get

Price of Bond = PV of Coupons + PV of Per Value

On putting the values in the above formula, we get

⇒                     = $\frac{100\times (1-(1+8 \ percent^{-4}))}{8 \ percent} +\frac{1000}{1+8 \ percent^{4}}$

⇒                     = $1066.24$

Now,

The total return rate = $\frac{(1066.24-1079.85+100)}{1079.85}$

                                   = $\frac{86.39}{1079.85}$

                                   = $8 \ percent$