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A bond that pays coupons annually is issued with a coupon rate of 4 percent, maturity of 30 years, and a yield to maturity of 8 percent. What rate of return will be earned by an investor who purchases the bond and holds it for 1 year if the bond’s yield to maturity at the end of the year is 9 percent? (7 marks)
Why are you setting me a test question? You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about and then I will explain.
You need to calculate the market value as of now (the PV of the future flows at 8%), and the market value in 1 years time (the PV of the future flows at 9%). The return to the investor one the year is the change in the MV plus the interest received for the year.
Both these principles are explained in full in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
I assume that you are using a Revision Kit from one of the ACCA approved publishers (BPP or Kaplan) as you certainly should be. I am astonished if this question appears in either of the kits because it is not the sort of question that the examiner asks in Paper FM!
Thanks John for your response, it is a question yes i got from a revision kit but it gave me hard time to calculate, with your response let me try it again,
but i would have loved if you could show me the step by step, am sorry to have included the marksI have told you the steps to take, and I explain them in my lectures. Again, if you say which bit of the answer in your revision kit you are not clear about then I will explain.
Which Revision Kit did you find this question in? I ask because this question needs you to discount for both 30 and 29 years. That means calculating the discount factors using the formula (because the tables only go up to 15 years) – this is not something that the Paper FM examiner normally expects.
Ok,
The question was given to me by one of the lecturers so what i was not sure of was the bond price, but with your explanation it makes sense
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