Question

# Bond Pricing Suppose you have a 7% annual coupon bond selling for \$950 with three years...

Bond Pricing

1. 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 r1 = 8%, r2 = 10.5% and r3 = 13%.
1. What is the bond’s current yield?
2. Calculate the bond’s yield to maturity.
3. What is the holding period return on your initial investment after the bond matures?
4. What is the bond’s realized compound yield?

 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)