You own a 10-year bond that pays 6 percent interest annually. The par value of t

Question

You own a 10-year bond that pays 6 percent interest annually. The par value of the bond is $1,100. The bond has a coupon rate of 8 percent, which is paid semiannually. It matures in 7 years and has a par value of $1,000. What is your expected rate of return?

Citigroup issued bonds that pay a 5.5 percent coupon interest rate. The bonds mature in 5 years. They are selling for $1,076. What would be your expected rate of return (yield to maturity) if you brought the bonds? What would the current yield be?

Explanation / Answer

(1)

period = 10*2 = 20

coupon rate per period = 8%/2 = 4%

1100 = 1000 * 4% * (1-(1+r/2)^(-20))/(r/2) + 1000 * (1+r/2)^(-20)

r = 6.62%

Thus, the expected rate of return is 6.62%

(2)

1076 = 1000*5.5%*(1-(1+i)^(-5))/i + 1000 * (1+i)^(-5)

i = 3.80%

Thus, the expected rate of return is 3.80%

current yield = annual coupon/current price = 55/1076 = 5.11%

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