I am looking to buy some bonds. These bonds mature in exactly seven years from t

Question

I am looking to buy some bonds. These bonds mature in exactly seven years from today, have a 2% coupon that is paid semi-annually and are priced to provide a Yield to Maturity today of 2.5%.Assume that I hold the bond for Two Years and am able at that time to sell them for PAR value. What is my annual rate of return for the two years that I held them? Enter this as a percentage, without the punctuation "%". That is, for 10%, enter "10" or "10.00" but NOT as "10%" and certainly not "ten percent." Yes, rounding may screw up your answer. Use at least hundredths of a percent.

Explanation / Answer

Computation of Price of Bond (Assuming Face Value of $1000)

Price of Bond = Semi Annual Interest * PVAF (1.25%, 14) + Redemption / (1.0125)^14

Price of Bond = 10 * 12.771 + 1000 / 1.19

Price of Bond = $968.0736

2. Computation of Annual return

Future Value = Present Value * (1+r)^n

1000 = 968.0736 * (1 + r)^4

1.032979 = (1+r)^4

1.008145 = 1 + r

Semi annual rate r = 0.8145%

Annual rate = 1.63 % or 1.63

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