a)
Face Value = $1,000
Current Price = $900
Maturity in 10 years
Annual Coupon Rate = 6%
Quarterly Coupon Rate = 6% / 4 = 1.5%
Quarterly Coupon = 1.5%*$1,000 = $15
Let Quarterly YTM be i%
900 = 15*PVIFA(i%, 40) + 1,000*PVIF(i%, 40)
i = 1.86%
effective rate of return = (1 + 1.86%)^4 - 1
EAR = 1.0765 - 1
EAR = 0.0765 = 7.65%
effective rate of return = 7.65%
b)
Current Price = $900
Sold after 5 years at $950
Annual Coupon Rate = 6%
Quarterly Coupon Rate = 6% / 4 = 1.5%
Quarterly Coupon = 1.5%*$1,000 = $15
Let Quarterly YTM be i%
900 = 15*PVIFA(i%, 20) + 950*PVIF(i%, 20)
i = 1.89%
EAR = (1 + 1.89%)^4 - 1
EAR = 1.0777 - 1
EAR = 0.0777 = 7.77%
effective rate of return =7.77%
Get Answers For Free
Most questions answered within 1 hours.