Question

**Bond Pricing**

- Suppose you have a 7% annual coupon bond selling for $950 with
three years until maturity and face value equal to $1,000.
Furthermore, suppose the interest rates in the next three years are
known (with certainty) to be r
_{1}= 8%, r_{2}= 10.5% and r_{3}= 13%.- What is the bond’s current yield?
- Calculate the bond’s yield to maturity.
- What is the holding period return on your initial investment after the bond matures?
- What is the bond’s realized compound yield?

Answer #1

a. Bond's current yield= $ Annual coupon interest /Current market price | |

ie. (7%*1000)/950= | |

7.37% | |

b.Bond’s yield to maturity | |

(8%+10.5%+13%)/3= | |

10.5% | |

c.Holding period return on your initial investment after the bond matures | |

Face value recd, at maturity | 1000 |

FV of the 3 yrs.' coupons ----- 70*(1.105^3-1)/0.105= | 232.82 |

Total | 1232.82 |

Initial investment | 950.00 |

Hoding period return at maturity | 282.82 |

Hoding period return %(282.82/950)= | 29.77% |

d. Bond’s realized compound yield | |

29.77% | |

(as in c. above) |

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