Exercise #2

Exercise #2 - n = 30, i = 7, FV = 1,000, PMT = 40 PV =...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 2 Chapter 6 Question 23 A bond that pays coupons annually is issued with a coupon rate of 4%, maturity of 30 years, and a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the bond and holds it for 1 year if the bond’s yield to maturity at the end of the year is 8%? Answer: The original price of the bond is computed as follows: 73 . 627 $ 07 . 1 000 , 1 $ ) 07 . 1 ( 07 . 0 1 07 . 0 1 40 $ PV 30 30 Financial calculator:
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Unformatted text preview: n = 30, i = 7, FV = 1,000, PMT = 40 PV = (-)627.73 After one year, the maturity of the bond will be 29 years and its price will be: 66 . 553 $ 08 . 1 000 , 1 $ ) 08 . 1 ( 08 . 1 08 . 1 40 $ PV 29 29 Financial calculator: n = 29, i = 8, FV = 1,000, PMT = 40 PV = (-)553.66 The capital loss on the bond is $553.66 $627.73 = $74.07. The rate of return is therefore: ($40 $74.07)/$627.73 = 0.0543 = 5.43%...
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