We have the Peterson 8 bond which has a maturity of 12 years

We have the Peterson 8% bond, which has a maturity of 12 years and a YTM of 6%. We buy it, and immediately the YTM drops to 4%. If we sell it after 2 years when YTM are 12%, what will be the ROR we attain?

Solution

Purchase Price = pv(rate,nper,pmt,fv)

Purchase Price = pv(6%,12,80,1000)

Purchase Price = 1167.68

Sell Price = pv(rate,nper,pmt,fv)

Sell Price = pv(12%,10,80,1000)

Sell Price = 773.99

Total coupon earned= 8%*1000 * 2 = 160

Total Return = Sell Price - Purchase Price + Total coupon earned

Total Return = 773.99 -1167.68 + 160

Total Return = - $ 233.69

Total ROR = Total Return/Purchase Price

Total ROR = -233.69/1167.68

Total ROR = -20.01%