Answer: Yield to Maturity (Return) = 9.04% , Value of the Bond in 2 years = $ 1656.71
Explanation:
Calculating the expected return (yield to maturity)
Future value = $1000
Price = $1200
Coupon = $110 (1000×11/100)
N (number of period) = 19 years
yield to maturity = (C + (Fv - P)÷N) / ((Fv+P)÷2)
yield to maturity = (110 + (1200 - 1000)÷19) / ((12000+1000)÷2)
yield to maturity = (99.47368421)/1100 = 0.090430622
yield to maturity = 9.04%
Calculating value of the bond in two years
Price = $1200
Coupon (Pmt) = $110 (1000×11/100)
N (number of periods) = 2 years
R (YIELD TO MATURITY) = 9.04%
Future Value of a bond = Future Value of the price + Future value of the annuity
FV = P(1+R)^n + (Pmt × (1+R)^2 - 1)/ R
FV = 1000(1 + 0.0904)^2 + 110(1 +0.0904)^2 - 1)/0.0904
FV = 1426.766592 + 229.944
FV = 1656.710596
FV = 1656.71
the selling price of the bond will be $ 1656.76
