You buy a bond today that has a coupon rate of 6.5%, with 10 years to maturity, and is trading at a YTM of 5.6% Assume that one year later, the bond is trading at a YTM of 5.0% What was the annual percentage return you earned by owning the bond? TIP: The annual return on a bond is equal to (Price(1) - P(0) + Coupon Payments)/P(0) See textbook, Section 6.4 Bond Rates of Return. Remember that when you calculate the value of the bond in one year, you will have received two coupons. Also, when you use the above formula, the prices of the bonds P(0) and P(1), as well as the coupons, should be calculated as dollars, not percentages of par value.
You buy a bond today that has a coupon rate of 6.5%, with 10 years to maturity, and is trading at a YTM of 5.6% Assume that one year later, the bond is trading at a YTM of 5.0% What was the annual percentage return you earned by owning the bond? TIP: The annual return on a bond is equal to (Price(1) - P(0) + Coupon Payments)/P(0) See textbook, Section 6.4 Bond Rates of Return. Remember that when you calculate the value of the bond in one year, you will have received two coupons. Also, when you use the above formula, the prices of the bonds P(0) and P(1), as well as the coupons, should be calculated as dollars, not percentages of par value.
Chapter14: Investing In Stocks And Bonds
Section: Chapter Questions
Problem 7DTM
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Transcribed Image Text:You buy a bond today that has a coupon rate of 6.5%, with 10 years to maturity, and is trading at a
YTM of 5.6%
Assume that one year later, the bond is trading at a YTM of 5.0%
What was the annual percentage return you earned by owning the bond?
TIP: The annual return on a bond is equal to (Price(1) - P(0) + Coupon Payments)/P(0)
See textbook, Section 6.4 Bond Rates of Return. Remember that when you calculate the value of the
bond in one year, you will have received two coupons.
Also, when you use the above formula, the prices of the bonds P(0) and P(1), as well as the coupons,
should be calculated as dollars, not percentages of par value.
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