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 semiannual interest payments and $1,000 par value.)

Question

Quizplus · Accepted Answer

To calculate the total return of a bond, we need to consider both the coupon payments and the change in price due to the change in yield.

First, we need to calculate the bond's price using the new yield to maturity:

n = 25*2 = 50 (since semiannual payments)
i = 7.15/2 = 3.575
P = 36.25*(1 - 1/((1+0.03575)^50)) + 1000/(1+0.03575)^50 = $935.33

Next, we calculate the coupon payment after one year:

C = 1000*0.0725/2 = $36.25

The total return would be the sum of the coupon payment and the change in price, divided by the initial price:

Total return = (C + (P - 985.22)) / 985.22 = 5.3%

Therefore, the correct answer is B) 5.3 percent.

A 725 Percent Coupon Bond with 25 Years Left to Maturity