You wish to purchase a debenture bond worth $11,000 atmaturity. before you buy,

Question

You wish to purchase a debenture bond worth $11,000 atmaturity. before you buy, you want to know what your ROR will be.the bond matures in 20 yrs with a bond interest of 6% to be paidout every 6 months. The face value at the end of 20 yrs will be$11,000. If you pay %5,600 for the bond today, what would youannual rate of return be (nominal)? * can be work in excel You wish to purchase a debenture bond worth $11,000 atmaturity. before you buy, you want to know what your ROR will be.the bond matures in 20 yrs with a bond interest of 6% to be paidout every 6 months. The face value at the end of 20 yrs will be$11,000. If you pay %5,600 for the bond today, what would youannual rate of return be (nominal)? * can be work in excel

Explanation / Answer

P = Current Price of the Bond C = Coupon P* = Expected Sale Price of Bond ROR = Expected rate of return P = C + P* / (1+ROR) ROR = C/P + (P* - P)/P P = $5,600 C = $11,000 * 6%/2 = $330 P* = $11,000 Note: The bond's rate of return (ROR)is equals to Current Yield + Capital gains yield. ROR = [$330 / $5,600] + ($11,000 -$5,600) / $5,600 ROR = 0.0589 + 0.964 ROR = 1.0229 (or) 102.29% Hope it may help you P = Current Price of the Bond C = Coupon P* = Expected Sale Price of Bond ROR = Expected rate of return P = C + P* / (1+ROR) ROR = C/P + (P* - P)/P P = $5,600 C = $11,000 * 6%/2 = $330 P* = $11,000 Note: The bond's rate of return (ROR)is equals to Current Yield + Capital gains yield. ROR = [$330 / $5,600] + ($11,000 -$5,600) / $5,600 ROR = 0.0589 + 0.964 ROR = 1.0229 (or) 102.29%

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