Answer:
33.8%
Explanation:
Purchase price of the bond will be computed using the formula below.
[tex]p=\frac{A(1-(1+r)^{-n} }{r} + \frac{F}{(1+r)^{n} }[/tex]
where A = annual coupon = 10% * 1000 = 100
r = yield to maturity = 0.1384
n = time to maturity = 20 years
F = face value = $1,000
p = price of the bond.
[tex]p=\frac{100(1-1.1384^{-20} }{0.1384} + \frac{1,000}{(1.1384)^{20} }\\p = 668.4721 + 74.8346\\p = 743.31[/tex]
Therefore, if Janet sold the bond a year later for $994.79,
the profit on sale = [tex]\frac{994.79}{743.31} -1=0.3383[/tex]
= 33.8% profit (rate of return).
