Corporate Bonds

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Question: How do you Calculate annual and total return on Corporate Bonds?

Doing a class project and I'm having a hard time understanding the language of investing. I need help, or a formula, on how to calculate annual and total return of a corporate bond into dollar ammount. Here is all the info. Please help! this is a foreign language to me.

Investing $15,000 in this bond.

Price: 102.90
Coupon (%): 5.700
Maturity Date: 18-May-2020
Yield to Maturity (%): 5.390
Current Yield (%): 5.540
Fitch Ratings: AAA
Coupon Payment Frequency: Semi-Annual
First Coupon Date: 18-Nov-2005
Type: Corporate
Callable: Yes

Again, any help would be amazing!! Thanks for your time!!

Answer: OK, here we go!

A bond is a loan from the holder to the issuing company. It is characterized by several numbers. They are:
- Nominal value: the amount that will be paid to the holder at the end of the life of the bond. Ex. 5000 $
- Time to maturity: the years left before the bond will be paid back. Ex. 15 years
- Coupon: the percentage of the nominal value that will be paid annually as interest. Ex. 5.7%, therefore 5.7% of $5000 = $285 will be paid per year.

Price: 102.90 This is the percentage of the nominal value you have to pay if you want to buy the bond now on the secondary market. Ex. 102.9% of $5000 =$5145.

Maturity Date: 18-May-2020 the day the nominal value of the bond will be paid back to the bond holder.

Yield to Maturity (%): 5.390 A rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity. Ex. the bondholder has to pay $5145 today, and will receive $285 interest each year plus $5000 at maturity.

Current Yield (%): 5.540 Annual interest rate paid by a bond, expressed as a percentage of its current market price. Ex. $285/$5145 = 5.54%

Fitch Ratings: AAA The bondholder is risking that the company goes bankrupt and that his bond will not be paid back. The Fitch rating measures the solidity of the company. AAA is the best rating, D is the worst.

Coupon Payment Frequency: Semi-Annual Ex. The $285 interest per year will be paid in two times $142.5

First Coupon Date: 18-Nov-2005 Obvious

Type: Corporate The bond is issued by a company, rather than a gouvernment.

Callable: Yes The company has to pay you interest each year. It might prefer to pay you back the $5000 on an earlier date than at maturity, for instance because the interest rates have dropped and it can finance itself cheaper.

Question: Please show how to calculate a 5-year Treasury bond has a 5.2 percent yield.?

. A 10-year Treasury bond yields 6.4 percent, and a 10-year corporate bond yields 8.4 percent. The market expects that inflation will average 2.5 percent over the next 10 years (IP10 _ 2.5%). Assume that there is no maturity risk premium (MRP _ 0), and that the annual real riskfree rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP _ LP _ 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What is the yield on this 5-year corporate bond?

Answer: K T-10 = 6.4%; kC-10 = 8.4%; LP =?; DRP = ?

k = k* + IP + DRP + LP + MRP.

K T-10 = 6.4% = k* + IP + MRP; DRP = LP = 0.

K C-10 = 8.4% = k* + IP + DRP + LP + MRP.

But we know from above that k* + IP + MRP = 6.4%; therefore,

K C-10= 8.4% = 6.4% + LP + DRP
2%= LP + DRP.

K T-5 = 5.2% = k* + IP + MRP; DRP = LP = 0.

K C-5 = k* + IP + MRP + DRP + LP
= 5.2% + 2%
= 7.7%

Ample liquidity in credit markets will lead stocks higher today