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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

BOND RETURNS Last year Joan purchased a 51,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. if Joan sold the bond today for $1,060.49, what rate of return would she have canted for the past year?

Summary Introduction

To identify: Rate of return earned in past years.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time, which can be used for decision making. Valuation of bond is done for comparison and analysis.

Explanation

Given,

Interest rate is 11% or 0.11.

Par value of bond is $1,000.

Maturity is after 10 years for bond.

Yield to maturity 9.79%.

Present value of bond is $1,060.49.

Calculated values (working note),

Purchase price is $890.

Formula to calculate rate of return,

Rateofreturn=(SellingpricePurchaseprice+Couponreceived)Purchaseprice

Substitute $1,060.49 for selling price, $ 890 for purchase price and $110 for coupon received.

Rateofreturn=($1,060.49$890+$110)$890=$280

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