Ariel purchased a 20-year corporate bond with a 12% coupon rate (payments made semiannually) and par value of $1000 for $1300. Six months later, after receiving a coupon payment, Ariel sold the bond. At the time of the sale, the market interest rate for this type of bond was 10%. What was Ariel’s rate of return? (The rate of return is simply Ariel’s percentage gain from this transaction. That is, the amount of extra money he made as a fraction of what he paid for the asset initially. This is explained in your reading on Moodle titled Understanding Interest Rates)
Show that if a coupon bond with N years of maturity sells at its face value (“at par”), then its coupon rate must equal its yield to maturity.