Question

The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a.	Suppose that today you buy an annual coupon bond with a coupon rate of 8.1 percent for $855. The bond has 7 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b-1.	Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b-2.	What is the HPY on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

no you dont

Answer 1

a. Coupon =8.1%*1000 =81
Number of Years =7
PV =855
Par Value =1000
YTM using financial calcuator
N=7;PMT=81;PV=-855;FV=1000;CPT I/Y =11.196703380442% or 11.20%
Rate =11.20%

b. Number of years =7-2 =5
New YTM =11.196703380442%-1% =10.196703380442%
Price using financial Calculalator
I/Y=11.196703380442%;N=5;PMT=-81;FV=-1000;CPT PV =920.9162
Price =920.92

b-2. HPY of investment =(price after 2 year -Price now+2*Coupon)/Price now=((920.92-855+2*81)/855 =26.67%