Question

4. A 10-year, 10% coupon bond with a face value of $1,000 is currently selling for $850. Compute the rate of return if you sell the bond next year for $900. If the bond price decreases to $700 next year, what would be the rate of return

Answer 1

Answer:

17.65% , 5.88%

Explanation:

If Price is $900 one year ahead,

future price = $900

current price = $850

yearly raise = 10% * (face value) = 0.1 * 1000 = $100

From Rate of return = (future price - current price + yearly raise)/current price

Rate of Return = (900 - 850 + 100)/850

Hence, Rate of Return = 17.65%

If Price is $700 one year ahead,

Similarly,

Rate of Return = (700 - 850 + 100)/850

Rate of Return = 5.88%