In January, you purchased a 14% semi-annual coupon bond ($1,0000 par) that had a remaining maturity of five years for $827.95.Six months later, immediately following an interest payment, you sold the bond.At the time of the sale, interest rates were 10%.What was your return?

Question

Quizplus · Accepted Answer

First, we need to calculate how much the bond was worth six months later after receiving the coupon payment:
Coupon payment = 14%/2 * $1,000 = $70
Remaining principal = $1,000
PV factor for 2.5 years at 10% = 0.62092 (from a financial calculator)
Value of the bond = $70 / (1 + 10%/2) + $1,000 / (1 + 10%/2)^5 = $1,038.80
We can then calculate the return:
Sale price = $1,038.80
Purchase price = $827.95
Coupon payments received = $70 (received once)
Total return = ($1,038.80 - $827.95 + $70) / $827.95 = 0.464 or 46.4%

In January, You Purchased a 14% Semi-Annual Coupon Bond ($1,0000