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    Calculating the annual return on a Junk bond

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    You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. How much will you have when the bond is retired after 12 years? What was the annual return you earned on this investment?

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    Solution Preview

    Please refer attached file for better clarity of expressions in MS Excel.

    In this case all coupon payments of $140 are reinvested at the interest rate of 9%.
    Now we calculate accumulated amount for these reinvestment of coupon ...

    Solution Summary

    The solution describes the steps to calculate annual return in the given case. Calculations are carried out with the help of functions in MS Excel.