You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1 000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately ________.

Question

Quizplus · Accepted Answer

The bond's coupon payment for the year would be:
$1,000 × 6% = $60

The price of the bond at the end of the year, given the change in yield to maturity, would be:
$60 ÷ 0.03 + $1,000 = $2,000

The investor purchased the bond for $1,000, received a coupon payment of $60, and sold the bond for $2,000. The total return is:
($60 + $2,000 - $1,000) ÷ $1,000 = 1.06 = 6%

Therefore, the annual total rate of return on holding the bond for that year would have been approximately 7.6% (since the bond was held for one year, divide 6% by the original price of $1,000 and multiply by 100 to get the annual rate of return in percentage terms).

You Purchased a 5-Year Annual Interest Coupon Bond One Year