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.)

Two years from now, the YTM on your bond has declined by 1 percentage point, and you decide to sell.

b. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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.)

Answer 1

a. FV = 1000, PMT = 81, N = 7, PV = -855

use rate function in Excel

yield to maturity = 11.20%

b. N = 5, FV = 1000, PMT = 81, rate = 10.20%

Use PV function in Excel

price of the bond = 920.92

Cash flows	Year
(855.00)	0
81.00	1
1,001.92	2

Use IRR function in Excel

HPY = 13.09%