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 11 percent for $1,200. The bond has 19 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

Ans a) Value of bond = Coupon * ( 1- (1+r)^(-n))/r + FV/(1+r)^n

Where value of bond = $1200

Coupon = 11% of 1000 = $110

n = 19 years

FV is face value of bond which is $1000

r is the required rate that need to be find.

1200 = 110 * (1 - (1+r)^(-19))/r + 1000/(1 + r) ^19

after solving by trail and error we will get the value of r = 8.8%

Ans b1) Value of bond = Coupon * ( 1- (1+r)^(-n))/r + FV/(1+r)^n

Where value of bond = need to be find

Coupon = 11% of 1000 = $110

n = 17 years

FV is face value of bond which is $1000

r = 7.8%

value of bond = 110 * (1 - (1.078)^(-17))/.078 + 1000/(1.078)^17

= $1296.2

Ans b2) holding period yield = (1296.2 - 1200)/1200 = 8.0167%