Answer:
18.13%
Explanation:
Assume Face value of bond = 1.000
Term = 20
Coupon rate = 5%
Yield rate = 5%
Coupon rate = Face value*Coupon rate = $1,000*5% = $50
Purchase price of bond = Face value = $1,000
After 1 year, Yield rate(YTM) = 4% and remaining term = 19 years
Sale price of bond = Coupon amount*PVIFA(YTM,n) + Maturity value*PVIF(YTM,n)
Sale price of bond = $50*PVIFA(4%, 19) + $1,000*PVIF(4%, 19)
Sale price of bond = $50*13.134 + $1,000*0.4746
Sale price of bond = $656.7 + $474.6
Sale price of bond = $1,131.30
Rate of return in 1 year = [Annual coupon amount + (Sale price-Purchase price) / Purchase price
Rate of return in 1 year = $50 + ($1,131.30-$1,000) / $1,000
Rate of return in 1 year = $181.3 / $1,000
Rate of return in 1 year = 0.1813
Rate of return in 1 year = 18.13%
