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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 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.

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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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