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Karen just bought a 10 year, 6 percent coupon bond with 1000 par for 850. if...

Karen just bought a 10 year, 6 percent coupon bond with 1000 par for 850. if she sells this bond two years later for 920, what is the realized yield per year for her two year holding (with semiannual interests)?
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Answer #1

Realised yield = Capital gain + interest income / amount invested

Capital gain = Future price - Current price

Interest income semi annual = 1000* 3 %

I.e. $ 30

Number of interest payments = 4 times

Interest income for two years = $30*4

=$ 120

Amomunt invested = Price paid to buy the bond i.e. $850

Calculation as per above formula

= (920-850) + (30*4) / 850

= 70 + 120 / 850

= 22.35 % For two years

I.e. 11.17 % per annum

Note - Discount rate is not provided in the question.

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