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

The current price of the bond can be calculated as follows:
PV = (35/((1+0.035)^1)) + (35/((1+0.035)^2)) + ... + (35/((1+0.035)^50)) + (1000/((1+0.035)^50)) = $953.65
Now, if the yield to maturity increases to 7.15%, the new price of the bond can be calculated as follows:
PV' = (35/((1+0.035)^1)) + (35/((1+0.035)^2)) + ... + (35/((1+0.035)^49)) + (1035/((1+0.035)^49)) = $956.50
The capital gain in one year would be ($956.50 - $953.65) = $2.85
The total return of the bond in percent would be (($35 + $35 + $1,000) / $953.65) - 1 = 7.39%
Therefore, the best choice is B (5.3 percent) as none of the choices match the calculated answer.

Bond Prices and Interest Rate Changes a 7