Question

You purchased a zero-coupon bond one year ago for $280.83. The market interest rate is now 9 percent. Assume semiannual compounding. If the bond had 15 years to maturity when you originally purchased it, what was your total return for the past year

Answer 1

Answer:

3.82%

Explanation:

Calculation to determine total return for the past year

First step is to find the price of the bond today.

P1= $1,000 / [1+(9%/2)]

P1= $1,000 / 1+.045

P1= $1,000 / 1.045

P1= $291.57

Now let determine the total return for the past year using this formula

R=Bond price today - Bond price one year ago/Bond price one year ago

Let plug in the formula

R= ($291.57 – $280.83) / $280.83

R=$10.74/$280.83

R= .0382*100

R=3.82%

Therefore total return for the past year is 3.82%