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). Requirement 1: Suppose that today you buy an annual coupon bond with a coupon rate of 7 percent for $875. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Rate of return % Requirement 2: Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. (a) What price will your bond sell for? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Price $ 944.65 (b) What is the HPY on your investment? (Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Holding period yield %

Answer 1

Requirement 1: Suppose that today you buy an annual coupon bond with a coupon rate of 7 percent for $875. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment?
=RATE(10,7%*1000,-875,1000)=8.94%

Requirement 2: Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell.
(a) What price will your bond sell for?
=PV(8.94%-1%,8,-7%*1000,-1000)=$945.86

(b) What is the HPY on your investment?
=(7%*1000+7%*1000+945.86)/875-1=24.10%