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Suppose I have bought a bond in some price - X, for 10 years. Now I decide to sell it 2 years after the purchase for some price - Y. I would like to calculate the ROR I got from this bond.

My real question is if I should annualize the cupons I got while holding the bond?

I would like to get the 'r' from:

x*(1+r)=2c+y

OR

x*(1+r)=c+y + c*(R_of_market)

OR

I'm horribly mistaken?

Thanks.

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For simplicity, assume that the purchase and sale both take place on an annual coupon date, after that day's coupon is cashed.

Arbitrarily, (won't change the answer) take the date of sale as the reference date, for comparing different amounts. Let r be the annual rate of return, and C is the value of the annual coupon.

  1. As of that date, the value of all expenditures (the purchase) is X * (1 + r)^2
  2. As of that date, the value of the coupons is C + C * (1 + r)
  3. As of that date, the value of the sale is Y

Set 1) + 2) = 3) and solve for r

For this or more complicated situations, the Excel function XIRR accepts a schedule of irregular dates and payments (positive and negative) and calculates the rate of return represented by the payments...

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