Required rate of return > Coupon rate, the bond will be valued at discount. Relevance. Do you agree Explain why or why not? The real rate of return on a bond is its annual nominal, or stated, return minus the annual rate of inflation. \$895.87 For example, a stock might pay quarterly dividends to shareholders, or a bond … Lv 7. The difference between rate of return and interest rate is based on the nature of returns on investments and interest paid on a loan or deposit. If you've held a bond over a long period of time, you might want to calculate its annual percent return, or the percent return divided by the number of years you've held the investment. b-2. 2 required rate of return is the 'interest' that investors expect from an investment project. The internal rate of return (IRR) (which is a variety of money-weighted rate of return) is the rate of return which makes the net present value of cash flows zero. The bond has a face value of \$1000 and a 4% coupon rate paid semiannually. a. For example, if you paid \$900 for a bond with a par value of \$1,000 that pays 6% interest, your rate of return is \$60 divided by \$900, or 6.67%. Assume a bond has \$1000 par value, a coupon rate of 6%, annual interest payments, and 7 years to maturity. We have noted that yield to maturity will equal the rate of return realized over the life of the bond if all coupons are reinvested at an interest rate equal to the bond's yield to maturity. The risk premium on the Risky Investment bond is _____ percentage points. It depends on both the interest promised or the coupon payment and the bond's purchase price. A bond works in much the same way as a loan. A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a bond. I think you probably meant the yield to maturity instead. The required rate of return on a bond is the interest rate that a bond issuer offers to get investors interested. Favorite Answer. 100/- par value bond carries a coupon rate of 16% interest payable semi-annually and has a maturity period of 10 years. Coupon rate is the annual rate of return the bond generates expressed as a percentage from the bond’s par value. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? The bond mutual fund has no such backing. Find information on government bonds yields, muni bonds and interest rates in the USA. (Round your answers to 2 decimal places.) Answer Save. rate of return). Coupon. This reflects the total return an investor receives by holding the bond until it … a. YTM is considered a long-term bond yield expressed as an annual rate. The fixed rate is an annual rate. Annualized Rate of Return. , the return on a discount (zero-coupon) bond is equal to the rate of capital gain by definition. (Round your answer to 1 decimal place.) c. Yield to maturity. With a bond, rate of return is the current yield, or your annual interest income divided by the price you paid for the bond. Face value. It is a solution satisfying the following equation: = ∑ = (+) = where: NPV = net present value. But let’s say the bond was purchased at a discount to face value – Rs 900. 9 years ago. The rate of return anticipated on a bond if held until the end of its lifetime. A Rs. Get updated data about US Treasuries. Suppose that a 5-year Treasury bond pays an annual rate of return of 1.3%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.1%. It has a par value of \$1,000 and twice every year issues a payment of \$50 to the note holder. Compounding is semiannual. Market interest rate represents the return rate similar bonds sold on the market can generate. Therefore, Adam realized a 35% return on his shares over the two-year period. The bond's actual sale price was \$8,750, so the \$1,000 coupon must be figured as a percent of \$8,750. The return you realize from an investment actually has two components: the increase or decrease in the price of the investment and any income you receive while you own the investment. A) par B) a discount C) a premium D) book value Answer: C 28) When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will _____. Premium B. The 10% coupon guarantees a return of \$1,000 on the notional (or nominal) value of the bond, which is \$10,000. The borrower, which can be either a government agency or a corporate entity, issues a bond. The market price of a bond is the present value of all expected future interest and principal payments of the bond, here discounted at the bond's yield to maturity (i.e. if the bond will be paid off at the end of ten years, what rate of return will the man Finance Thompson Enterprises has \$5,000,000 of bonds outstanding. If the yield on similar bonds is 8%, what is the current market value of this bond? The current yield would be 6.6% (Rs 60/ Rs 900). The bond buyer serves as a lender, allowing the bond issuer to use the funds from the bond purchase in return for a later repayment with interest. C) direct D) inverse Answer: C 27) If the required return is less than the coupon rate, a bond will sell at _____. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? The company knows this, so they increase the price of the bond and issue it at a premium. For example, consider again our ABC Corporation bond. Real Rate of Return. Unlike the fixed rate which does not change for the life of the bond, the inflation rate can and usually does change every six months. 1000 / 8750 = 11.43% Yield rate is a bond’s rate of return relative to what an investor actually paid for the asset, not relative to its initial face value. Figuring Bond Return. Say that the coupon rate on the 30-year Treasury bond example discussed earlier is 5 percent. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? 3. Discount bonds are ones that are bought at a price below the face value, with the face value paid out at the time of maturity. Does the length of time to maturity affect the extent to which a given change in The rate of return on a bond is a better reword measure than the yield to maturity". Required rate of return > Coupon rate, the bond will be valued at - Published on 14 Sep 15. a. b. Inflation rate . The rate of return required by investors in the market for owning a bond is called the: a. That fixed rate then applies to all I bonds issued during the next six months. When the market’s required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: A. Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price? When a bond is purchased at face value, the current yield is the same as the coupon rate. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and its YTM? 14. the __ the investo'rs required rate of return on a bond, the __ will be the value of the bond to the investor. If an investor required rate of return (Discount rate) for this bond is 85 for six months the value of the bond will be: The value of bond which gives interest semi … Yield is the annual rate of return on a bond bought on the open market.. d. Coupon rate. The rate of return on a bond held to its maturity date is called the bond’s yield to maturity. Yield to Maturity. The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity (YTM). Explanation: Yield in case of bonds represents the annual return on an investment. Bonds have a face value, generally in denominations of \$1,000. The five-year average for short-term government bond funds was 4.2 percent as of Feb. 16, 2012, according to the Morningstar Government Bond Index Performance. Coupon rate compounding frequency that can be Annually, Semi-annually, Quarterly si Monthly. For instance, a \$1,000 bond held over three years with a \$145 return has a 14.5 percent return, but a 4.83 percent annual return. Treasury b. floating rate c. junk d. zero coupon 15. Plug all the numbers into the rate of return formula: = ((\$250 + \$20 – \$200) / \$200) x 100 = 35% . b-1. … The company would issue the \$500,000 bond for a selling price of \$540,573. 3 Answers. In that case, the 10 percent coupon rate of the bond is a better return than you could get elsewhere. coupon rate is the interest that investors receive periodically as a reward from investing in a bond The average return on government bond funds will vary based on the period of time being measured and on the longevity of bonds held in the fund. Note that the regular rate of return describes the gain or loss, expressed in a percentage, of an investment over an arbitrary time period. Consider, for example, a two-year bond selling at par value paying a 10% … Discount C. Par D. Cannot be determined without more information. Treasury bonds pay interest semi-annually based on a stated rate called a coupon rate. Home >> Category >> Finance (MCQ) Questions and answers >> Management Accounting; Q. That means that for every \$100 of bonds investors receive \$2.50 every six months, an annual return of \$5. PrivateBanker.