Question

Assume that an investor pays ?$920 for a? long-term bond that carries a coupon of 11?%. In 3? years, he hopes to sell the issue for ?$1,020. If his expectations come? true, what yield will this investor? realize? (Use annual? compounding.) What would the holding period return be if he were able to sell the bond? (at ?$1,020?) after only 9? months?

Answer 1

Yield is the rate at wich PV of Cash Inflows are equal to its price.

Yield = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to inc in 1% ] * 1%

= 15% + [ 1.82 / 21.30 ] * 1%

= 15% + 0.09%

= 15.09%

Part B:

Holding period Ret :

As a year is not completed, Coupon amount is not received.

= [Sale Price / Purchase price] - 1

= [ 1020 / 920 ] - 1

= 1.1087 - 1

= 0.1087 i.e 10.87%