Suppose that today you buy a bond with an annual coupon of 6 percent for $1,080. the bond has 13 years to maturity. what rate of return do you expect to earn on your investment? assume a par value of $1,000. (do not round intermediate calculations. enter your answer as a percent rounded to 2 decimal places,

e. g., 32.16.)

Assuming the bond has a par value of $1,000 and pays semi-annually, the BEY (equivalent bond yield) when you bought it was 5.14828%

[Do an IRR calculation: CF0: (1,080), 25 cash flows of 1,000*0.03 = 30, and a final cash flow of par + coupon $1,030. Double that IRR to reflect BEY on an annual basis.]

So, if YTM falls to 4.14828% ...

0.0414828 / 2 = 0.02074
Price = sum of the discounted cash flows.

PV of the coupons, use PV ordinary annuity

n = (13 - 2) * 2 = 22 semi-annual periods remain

PVoa = PMT[ (1 - (1 / (1 + r) ^n)) / r]

= 30[ (1 - (1 / 1.02074^22)) / 0.02074]

= 30[ (1 - 0.63658) / 0.02074]

= 30[17.52141]

= 525.64

PV of par: 1,000 / 1.02074^22 = 636.58137

Sum PV coupons + PV Par = Price = $1,162.22

Notice the bond sells at a premium b/c the coupon rate is higher than the market (discount) rate. Some "value" has been added b/c of the "pull to par" - less time until you collect par at the maturity date.

HPY = [ (coupons collected + sale price) / purchase price] - 1

coupons for 2 years = 4 * 30 = 120

HPY = [ (120 + 1162.22) / 1080] - 1

= 0.18724, or 18.72%