The YTM on a bond is the interest rate you earn on your investment if interest r

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 9 percent for $1,040. The bond has 18 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 pece rounded to 2 decimal places, e.g. 32.16.) Expected rate of return 8.56 | % 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 S1131.13 b2. What is the HPY an your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places,e.g. 32.16) HPY

Explanation / Answer

1040=90/(1+r)+90/(1+r)^2+90/(1+r)^3+...+1090/(1+r)^18

we can get Expected Rate of Return equals to r=8.93%

Now if YTM that is 8.93% decreases by 1% then resultant YTM will be 7.93%

=90/(1+7.93%)+90/(1+7.93%)^2+90/(1+7.93%)^3+...+1090/(1+7.93%)^16

Value of Bond will be $1121.68

We hodl bond for 2 years in which we earned 2 annual coupons

1121.8+180=(1301.8/1040)-1=25.17%

HPY = (Income+End Period Value-Start Period Value)/Start Period Value

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