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The twenty-year bond yields 6.1% and has a coupon of 8.1%. If this yield to maturity...

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Finance

The twenty-year bond yields 6.1% and has a coupon of 8.1%. Ifthis yield to maturity remains unchanged, what will be its priceone year hence? Assume annual coupon payments and a face value of$100. (Do not round intermediate calculations. Round youranswer to 2 decimal places.)

Price           $

b. What is the total return to an investor whoheld the bond over this year? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces.)

Total return            %

Answer & Explanation Solved by verified expert
4.0 Ratings (481 Votes)

a

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =19
Bond Price =? [(8.1*100/100)/(1 + 6.1/100)^k]     +   100/(1 + 6.1/100)^19
                   k=1
Bond Price = 122.14

b

Current price:

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =20
Bond Price =? [(8.1*100/100)/(1 + 6.1/100)^k]     +   100/(1 + 6.1/100)^20
                   k=1
Bond Price = 122.75
rate of return = ((selling price+coupon)/purchase price-1)*100

=((122.14+8.1)/122.75-1)*100= 6.1%
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