Bond Prices and Interest Rate Changes A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

Question

Quizplus · Accepted Answer

Since the bond is priced to offer a 7% yield to maturity, its current price is $972.42, calculated using the financial calculator. 
If the yield to maturity changes to 7.15% after one year, the bond price would decrease to $957.32. 
The total return of the bond in percent can be calculated using the formula: (Coupon payment + (Ending price - Beginning price)) / Beginning price x 100. 
The coupon payment is $36.25 (7.25% of $1,000 / 2 payments per year), the beginning price is $972.42, and the ending price is $957.32. 
Therefore, the total return is ($36.25 + ($957.32 - $972.42)) / $972.42 x 100 = 5.32%, which is closest to option B, 5.3%.

Bond Prices and Interest Rate Changes a 7