What is the expected rate of return on a bond that matures in 8 years,
QUESTION
What is the expected rate of return on a bond that matures in 8 years, has a par value of $1,000, a coupon rate of 12%, and is currently selling for $976? Assume annual coupon payments.
Bond solution: Interest payments = Par value * coupon rate Interest payments = $1,000 * 14% Interest payments = $140 Market price = Par Value (PVIF(i,n)) Interest payments (PVIFA (i,n)) $911 = $1,000 (PVIF (i, 7)) $140 (PVIFA (i,7)) Trial and error: If 13%, market price
= $1,044 If 14% = $1,000 If 15% = $958 If 16% = $919 so the closest answer is 16% Using the excel formula, we can say thatrate ( nper,pmt,pv,fv)=rate(7,1000*14%,-911,1000)= 16.22%
ANSWER:
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