Maturity of Bond
Yield
4 Years 8 Years
30 Years
4.0%
$
1,036.3
0
$
1,067.3
3
$
1,172.9
2
5.0%
$
1,000.0
0
$
1,000.0
0
$
1,000.0
0
6.0%
$
965.35
$
937.90
$
862.35
22.A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $114
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.)
Rate of Return
a.
6%
%
b.
11.4%
%
c.
13.4%
%
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers
should be used for the actual calculations.
The price of the bond at the end of the year depends on the interest rate at that time. With 1 year
until maturity, the bond price will be $1,114/(1 +
r
).
a.
Price = $1,114/1.06 = $1,050.94
Rate of return = [$114 + ($1,050.94 − $1,000)]/$1,000 = 0.1649 = 16.49%
b.
Price = $1,114/1.114 = $1,000
Rate of return = [$114 + ($1,000 − $1,000)]/$1,000 = 0.1140 = 11.40%
c.
Price = $1,114/1.134 = $982.36
Rate of return = [$114 + ($982.36 − $1,000)]/$1,000 = 0.0964 = 9.64%
A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer