Question 1181665: Determine the return for the buyer of a 7-year, 3% bond of PhP 500,000 face value if on the date it is issued it is purchased from its original owner for PhP 450,000.
Answer by CPhill(1959)   (Show Source):
You can put this solution on YOUR website! Here's how to calculate the return for the buyer of the bond:
1. **Calculate the Annual Interest Payment:**
* Annual interest = Face value * Coupon rate
* Annual interest = PhP 500,000 * 0.03 = PhP 15,000
2. **Calculate the Total Interest Received Over the Bond's Life:**
* Total interest = Annual interest * Number of years
* Total interest = PhP 15,000 * 7 = PhP 105,000
3. **Calculate the Capital Gain:**
* Capital gain = Face value - Purchase price
* Capital gain = PhP 500,000 - PhP 450,000 = PhP 50,000
4. **Calculate the Total Return:**
* Total return = Total interest + Capital gain
* Total return = PhP 105,000 + PhP 50,000 = PhP 155,000
5. **Express the Return as a Percentage (Total Return):**
* Total Return Percentage = (Total Return / Purchase Price) * 100
* Total Return Percentage = (155,000 / 450,000) * 100 ≈ 34.44%
6. **Annualized Return (Yield to Maturity - Approximate):**
A precise Yield to Maturity (YTM) calculation is complex and usually requires a financial calculator or software. However, we can get an *approximation* of the annualized return by dividing the total return percentage by the number of years:
* Approximate Annualized Return = Total Return Percentage / Number of Years
* Approximate Annualized Return = 34.44% / 7 ≈ 4.92%
**Summary:**
* **Total Return:** PhP 155,000
* **Total Return Percentage:** Approximately 34.44%
* **Approximate Annualized Return (YTM):** Approximately 4.92%
**Important Note:** The 4.92% is an *approximation* of the YTM. The actual YTM might be slightly different. For precise YTM calculation, you should use a financial calculator or spreadsheet software.
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