Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to ma

Question

Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to maturity of 6.5%. If the market interest rates on 15-year instruments fall from 6.5% to 5.2%, what is the expected yearly yield on the bond you are currently holding? A. 5% B. 5.2% C. 5.85% D. 6.5% E. Can’t answer with given information Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to maturity of 6.5%. If the market interest rates on 15-year instruments fall from 6.5% to 5.2%, what is the expected yearly yield on the bond you are currently holding? A. 5% B. 5.2% C. 5.85% D. 6.5% E. Can’t answer with given information A. 5% B. 5.2% C. 5.85% D. 6.5% E. Can’t answer with given information

Explanation / Answer

Answer :The coupon rate on the bonds has been remained fixed . The expected yearly yield on the bonds you are currently holding has been calculated as follows :

r= (1+I/n)n -1

I= Nominal interest rate = 5.2%

n = Yearly payment

r = (1+0.052/1)1  - 1

r= 1.052-1 = 0.052 = 5.2%

So expected yearly yield is 5.2%

Option B is correct.

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