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Calculating average return of an investment in a bond

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Suppose an 8% coupon, ?1000 face value, 30-year bond that makes semiannual coupon payments is selling ?1276.76. What average rate of return would be earned by an investor purchasing this bond at this price?

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Solution Summary

The solution describes the methodology to calculate average return earned on an investment in a coupon paying bond by using functions in MS Excel and without using MS Excel.

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Please refer attached file for calculating Return by using Excel. Following is the methodology to calculate average return without using MS Excel.

Solution :
Mathematically price of a bond is defined as summation of all PV's of all future payments
No. of periods=60
Coupon payment=40
Price=1276.76

Sum of all PVs of future ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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