Question

Consider a bond with the following characteristics today (Year 0): Face Value=$1,000 Coupon Rate=4% Interest Rate=5%...

Consider a bond with the following characteristics today (Year 0):

Face Value=$1,000
Coupon Rate=4%
Interest Rate=5%
Time to maturity=13 years

What is the total yield in Year 4?

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Answer #1

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5%

And n is the no of Compounding periods 13

Coupon 4%

=

= 375.74291952 + 530.3213506

= 906.06

Value of Bond after 4 years

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5%

And n is the no of Compounding periods 9

Coupon 4%

=

= 284.312867048 + 644.60891619

= 928.921783238

Total yield = Coupon * 4 years + Capital Gain

= 40 * 4 + (928.921783238 - 906.06)

= 182.86

Yield % = 182.86 / 906.06

= 20.18%

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