Finance - annual return?
Two years ago, you bought an annual coupon bond with a 5.5% coupon rate, a concede to maturity of 9.0% and 5 years remaining to old age. The yield to old age on the bond is now 8.0%. If you vend the bond today (after receiving your second coupon payment), what decisive annual return will you have made?
a. 4.1%
b. 5.5%
c. 8.4%
d. 10.0%
e. 10.3%
Dont know how to return with started. Any help is appreciated
Answers: Let N be the nominal appeal of the bond. Then each coupon will be 0.055xN. Two years ago you bought the bond for a cost P0. The discounted cashflow at the time be (r0=9%):
P0=N/(1+r0)^5 + sum(k=1..5) 0.055xN/(1+r0)^k = 0.86386 N.
Today you sell for P2, selling away a discounted cashflow of P2 = N/(1+r1)^3 + sum(k=3..5) 0.055x N/(1+r1)^(k-2) = 0.93557xN, where on earth r1=8%
We're almost there. Your total return is P2/P0=(0.93557+2x0.055)xN/0.86386 N = 1.21 or 10% per year.
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a. 4.1%
b. 5.5%
c. 8.4%
d. 10.0%
e. 10.3%
Dont know how to return with started. Any help is appreciated
Answers: Let N be the nominal appeal of the bond. Then each coupon will be 0.055xN. Two years ago you bought the bond for a cost P0. The discounted cashflow at the time be (r0=9%):
P0=N/(1+r0)^5 + sum(k=1..5) 0.055xN/(1+r0)^k = 0.86386 N.
Today you sell for P2, selling away a discounted cashflow of P2 = N/(1+r1)^3 + sum(k=3..5) 0.055x N/(1+r1)^(k-2) = 0.93557xN, where on earth r1=8%
We're almost there. Your total return is P2/P0=(0.93557+2x0.055)xN/0.86386 N = 1.21 or 10% per year.