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? (Do not rTwo 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?What is the HPY on your investment?

Explanation / Answer

The YTM on a bond is the interest rate you earn on your investment if interest rates dont 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? (Do not rTwo 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?What is the HPY on your investment?

Answer

1) Rate of return do you expect to earn on your investment = rate(nper,pmt,pv,fv)

Rate of return do you expect to earn on your investment = rate(18,90,-1040,1000)

Rate of return do you expect to earn on your investment = 8.56%

2) price will your bond sell for = pv(rate,nper,pmt,fv)

price will your bond sell for = pv(7.56%,16,90,1000)

Price will your bond sell for = $ 1131.13

3) HPY on your investment = (90*2 + 1131.13-1040)/1040 * 1/2

HPY on your investment for 2 year = 26.07%

HPY on your investment (annually) = 26.07*1/2

HPY on your investment (annually) = 13.035% or 13.04%

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