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Bond Returns

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One bond has a coupon rate of 8 percent, another a coupon rate of 12 percent. Both bonds have 10-year maturities and sell at a yield to maturity of 10 percent. If their yields to maturity next year are still 10 percent, what is the rate of return on each bond? Does the higher coupon bond give a higher rate of return?

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Calculates rate of returns on bonds.

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One bond has a coupon rate of 8 percent, another a coupon rate of 12 percent. Both bonds have 10-year maturities and sell at a yield to maturity of 10 percent. If their yields to maturity next year are still 10 percent, what is the rate of return on each bond?

We will calculate the price of both the bonds, now and one year later

To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

Bond 1
Price of bond 1 now
Coupon rate= 8.000%
Face value= $1,000
Interest payment per year= $80.00 =8.% x 1000

Frequency= S Semi Annual

No of years to maturity= 10
No of Periods=n= 20 =2x10

Discount rate annually= 10.00%
Discount rate per period=r= 5.00% =10.%/2 Semi Annual

Price of bond=PVIFA X Interest Payment per period +PVIF X Redemption ...

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