A bond with a face value of $1,000 has 10 years until maturity, carries a coupon

Question

A bond with a face value of $1,000 has 10 years until maturity, carries a coupon rate of 8.0%, and sells for $1,200. Interest is paid annually. a. If the bond has a yield to maturity of 10.0% 1 year from now, what will its price be at that time? (Do not round intermediate calculations. Round your anser to nearest whole number.) Price$ 885 b. What will be the annual rate of return on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.) Rate of return 9% c. Now assume that interest is paid semiannually. What will be the annual rate of return on the bond? O Slightly greater than your part b answer Slightly less than your part b answer d. If the inflation rate during the year is 3%, what is the annual real rate of return on the bond? Assume annual interest payments.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Negative amount should be indicated by a minus sign.) Real rate of return

Explanation / Answer

a)use pv formuale in excel
pv(rate,nper,pmt,fv,type)
=pv(10%,9,(1000*8%),1000,0)
=885
b)annual rate of return on the bond=(final+coupon-iniital)/initial
initial price of the bond =1200
=(885+(1000*8%)-1200)/1200
=-19.58%
c)slightly greather than part b answer
d)Rate of return=((1+nominal)/(1+inflation))-1
=((1-19.58%)/(1+3%))-1
=-21.93%

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