6-3 One bond has a coupon rate of 6.6%, another a coupon rate of 8.3%. Both bond
ID: 2731079 • Letter: 6
Question
6-3
One bond has a coupon rate of 6.6%, another a coupon rate of 8.3%. Both bonds pay interest annually, have 15-year maturities, and sell at a yield to maturity of 8.0%.
a.
If their yields to maturity next year are still 8.0%, what is the rate of return on each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)
Rate of return
Bond 1
%
Bond 2
%
One bond has a coupon rate of 6.6%, another a coupon rate of 8.3%. Both bonds pay interest annually, have 15-year maturities, and sell at a yield to maturity of 8.0%.
Explanation / Answer
a. Let the Face value of bond be $1000
Current share price of first bond = 66 x Cumulative PVF @ 8% for 15 years + 1000 x PVF @ 8% for 15th year
= (66 x 8.559) + (1000 x 0.315)
= $879.89
Rate of return = [(Total interest + maturity value) / Initial investment x 100] / 15
= [(990 + 1000) / 879.89 x 100] / 15
= 226.16 / 15
= 15.08%
Current share price of second bond = 83 x Cumulative PVF @ 8% for 15 years + 1000 x PVF @ 8% for 15th year
= (83 x 8.559) + (1000 x 0.315)
= $1025.40
Rate of return = [(Total interest + maturity value) / Initial investment x 100] / 15
= [(1245 + 1000) / 1025.40 x 100] / 15
= 218.94 / 15
= 14.60%
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