Question

uppose you buy a bond with a coupon of 7.8 percent today for $1,080. The bond has 5 years to maturity. Assume interest payments are reinvested at the original YTM. a. What rate of return do you expect to earn on your investment

Answer 1

45.58%

Step-by-step explanation:

Rate of return is the expected gain or loss on an investment, over a specific time period. It is derived as a percentage of the investment's original value or cost.

ROR = [CV - IV]/ IV × 100

CV is the current value of the investment (value at the end of the investment period)

IV is the initial value of the investment.

Note also, the assumption that interest payments are reinvested.

At the end of year 1, interest payment is $1,164.24

End of year 2 - $1,255.05

End of year 3 - $1,352.95

End of year 4 - $1,458.48

End of year 5 - $1,572.24

[Interest rate - 7.8%]

ROR = (1572.24 - 1080)/1080 × 100

ROR = 45.58%