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6 January, 18:46

Last year Janet purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 10.17%. If Janet sold the bond today for $1,101.03, what rate of return would she have earned for the past year

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  1. 6 January, 21:14
    0
    28.26%

    Explanation:

    The rate of return earned by the bond investor could be determined using holding period formula given thus:

    Holding period return=P1-Po+C/Po

    P1 is the price of the bond now which is $1,101.03

    Po is the original purchase price, which can be computed using pv formula in excel as below:

    =-pv (rate, nper, pmt, fv)

    rate is the yield of 10.17%

    nper is the duration for which the coupon would be paid which is 10 years

    pmt is the annual coupon=$1000*9%=$90

    fv is the face value of $1000

    =-pv (10.17%,10,90,1000) = $ 928.63

    C is the annual coupon of $90 received over one year

    Holding period return = ($1,101.03-$928.63+$90) / $928.63 = 28.26%
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