Question

You purchased an annual-interest coupon bond one year ago with six years remaining to maturity at the time of purchase. The coupon interest rate is 10%, and par value is $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 bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been Group of answer choices None of the choices are correct 7.00% 9.95% 8.00% 11.95%

Answer 1

Answer: 11.95%

Explanation:

Present value of the bond before you sold it;

FV = 1,000

N = 6

PMT = 100 = 10% * 1,000

Rate = 8%

Using excel to calculate, use the PV function;

Present value of bond = $1,092.46

Present value of bond after you sell it;

FV = 1,000

N = 5

PMT = 100 = 10% * 1,000

Rate = 7%

Present value = $1,123.01

The Annual total rate of return will be = ( New Price - Old price + Income) / Old price

= ( 1,123.01 - 1,092.46 + 100) / 1,092.46

= 11.95%