Question

Consider a 30-year, 10% coupon bond, purchased at Par. They day after purchase, the yield on this bond doubles. What is the minimum number of whole years you would have to hold this bond in order to get a higher return than you expected when you purchased the bond?

Answer 1

If bond is purchased at par then coupon is always equal to yield.

Suppose the face value of bond is $1000 then Interest & yield per annum will be $1000*10% = $100 per year

Now since the bond period is 30 year, the expected return is $100 per year for 30 years totalling to $3000

Since the yield on this bond doubles the next day, it mean now the yield has become $200 per year.

Minimum number of years to hold bond to get a expected return($3000)will be equal to $3000/$200= 15 years.

Thus, minimum number of whole years you would have to hold this bond in order to get a higher return than you expected when you purchased the bond should be atleast 16 whole years as in 16 years period yeild to maturity will be $200*16=$3200.