Question

Simon Pause Corporation bonds have a zero-coupon rate, mature in ten years, and have a current yield to maturity of 5% annual rate, compounded semiannually.

a. What is the price per $100 of face value of Simon Pause Corporation bonds?

b. Suppose in three years the market price of the bond is 66.11178 per $100 of face value. What will the yield to maturity be at that time?

c. Suppose you purchased the Simon Pause bond today and sold the bonds in three years for 66.11178 per $100 of face value. What is your holding period yield for this investment?

Hint: The holding period yield is defined as the interest rate that sets the price of a bond equal to the present value of the realized cash flows the investor received from holding the bond. (The holding period yield will equal the yield to maturity for an investor who buys a bond and holds the bond until maturity).

Answer 1

a. use PV function in EXCEL to find the price of the bond

=PV(rate,nper,pmt,fv,type)

Please remember that the rate is semi-annual compounded.

rate=5%/2=2.5%

nper=10 years*2=20

pmt=0 (because of zero coupons)

fv=100

=PV(2.5%,20,0,100,0)=$61.03

Price of bond=$61.03

b. Use RATE function in EXCEL to find the yield to maturity

=RATE(nper,pmt,pv,fv,type)

nper=7 years*2=14 (after 3 years:10-3=7)

pmt=0

pv=66.11178

fv=100

=RATE(14,0,-66.11178,100,0)=3%

Annual Yield to Maturity=2*3%=6%

c. Holding period rate of return=(66.11178-61.03)/61.03=8.33%