A 2-year maturity bond with face value of $1,000 makes annual coupon payments of

Question

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $90 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is (Do not round intermediate calculations. Round your answers to 2 decimal places.)

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $90 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Explanation / Answer

a. Price of the share at current YTM = 90/(1+0.06)1 + 90/(1+0.06)2 + 1,000/(1+0.06)2 = $1,055
Rate of Return = 90 / 1,055 = 8.53%

b. In this case, YTM = 9% = Coupon rate. Thus, Rate of Return = 9%

c. Price of the share at current YTM = 90/(1+0.11)1 + 90/(1+0.11)2 + 1,000/(1+0.11)2 = $965.75
Rate of Return = 90 / 965.75 = 9.32%

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