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i Safari File Edit View History Bookmarks Window Help [62% il. Fri 1 1:07:16 AM aE Chegg Study Guided Solutions a HW 6 Fantasy Football Yahool Sports Saved Help Save & Exit Submit Check my work A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $106 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. Enter your answers as a percent rounded to 2 decimal places.) 9.09 points Rate of Return a. | 6% b. | 10.6% c, 12.6% eBook Print Bond

Explanation / Answer

Answer:

The price of the bond at the end of the year depends on the interest rate at that time. With 1 year until maturity, and with the cash flow of $1106 ($1000 + $106), the bond price using the bond PV formula is:

= $1106 / (1+r)

Ans a). At 6%

Price of bond = $1106 / 1.06 = $1043.39

Rate of return (at 6%) = [ $106 + ($1043.39 - $1000)] / $1000

So the Rate of return (at 6%) = 0.1494 or 14.94%

Ans b). At 10.6%

Price of bond = $1106 / 1.106 = $1000

Rate of return (at 10.6%) = [ $106 + ($1000 - $1000)] / $1000

So the Rate of return (at 10.6%) = 0.106 or 10.6%

Ans c). At 12.6%

Price of bond = $1106 / 1.126 = $982.23

Rate of return (at 12.6%) = [ $106 + ($982.23 - $1000)] / $1000

So the Rate of return (at 12.6%) = 0.0882 or 8.82%

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