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 a bond with an annual coupon of 10 percent for $1,190. The bond has 18 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected rate of return

%

b1.	Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Bond price

$

b2.	What is the HPY on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

HPY

%

Answer 1

a). To find the YTM, we need to put the following values in the financial calculator:

INPUT	18		-1,190	10%x$1,000=$100	$1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		7.98

So, Expected Rate of Return = 7.98%

b1). To find the Bond Price, we need to put the following values in the financial calculator:

INPUT	16	6.98		10%x$1,000=$100	$1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,286.12

So, Bond Price = $1,286.12

b2). HPY = [P2 - P0 + D1 + D2] / P0

= [$1,286.12 - $1,150 + $100 + $100] / $1,150 = $336.12 / $1,150 = 29.23%