Chapter 7, Problem 17P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# BOND RETURNS Last year Janet purchased a $1,000 face value corporate bond with an 8% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.45%. If Janet sold the bond today for$820.17, what rate of return would she have earned 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,

Coupon rate is 8% or 0.08.

Par value of bond is $1,000. Maturity is after 15 years of bond. Yield to maturity 10.45%. Present value (current price) of bond is$820.17.

Calculated values (working note),

Purchase price is $890. Formula to calculate rate of return, Rateāofāreturn=(SellingāpriceāPurchaseāprice+Couponāreceived)Purchaseāprice Substitute$820.17 for selling price, $818.34 for purchase price and$80 for coupon received

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