Question

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)?

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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