An investor is considering the purchase of a(n) 7.625 %, 18-year corporate bond that's being priced to yield 9.625 %. She th
inks that in a year, this bond will be priced in the market to yield 8.625 %. Using annual compounding, find the price of the bond today and in 1 year. Next, find the holding period return on this investment, assuming that the investor's expectations are borne out.
1 answer:
Answer:
The correct answer is 18.84%.
Explanation:
According to the scenario, computation of the given data are as follows:
Time period ( Nper) = 18 years
Rate = 9.625%
Let FV = $1,000
Coupon rate = 7.625%
Then, Coupon payment = $1,000 × 7.625% = $76.25
Attachment is attached of financial calculator
So PV = $831.95
After 1 year
Time period (Nper) = 17 years
Rate = 8.625%
Payment = $76.25
Attachment is attached of financial calculator
So, Pv = $912.46
So, we can calculate the holding period return by using following formula:
Holding period return = Total return ÷ Investment × 100
= ( $912.46 + $76.25 - $831.95) ÷ $831.95 × 100
= 18.84%
You might be interested in