ch 7 #6 The YTM on a bond is the interest rate you earn on your investment if in
ID: 2654810 • Letter: C
Question
ch 7
#6
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).
Suppose that today you buy a bond with an annual coupon of 11 percent for $1,130. The bond has 18 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
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 final answer to 2 decimal places. (e.g., 32.16))
a.Suppose that today you buy a bond with an annual coupon of 11 percent for $1,130. The bond has 18 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Annual Yield = 1000*11% + (1000-1130)/18 =110-130/18=102.78 So, Approx YTM = 102.78/(1130+1000)/2 =9.65% Expected Return = 9.65% Value of Bond after 2 year PV factor PV factor Present Year Interest at 11% at 10% Value 3 100 0.751315 75.13 4 100 0.683013 68.30 5 100 0.620921 62.09 6 100 0.564474 56.45 7 100 0.513158 51.32 8 100 0.466507 46.65 9 100 0.424098 42.41 10 100 0.385543 38.55 11 100 0.350494 35.05 12 100 0.318631 31.86 13 100 0.289664 28.97 14 100 0.263331 26.33 15 100 0.239392 23.94 16 100 0.217629 21.76 17 100 0.197845 19.78 18 1100 0.179859 197.84 Total 826.45 After 2 year Price will be 826.45 Question b2. Annual Return on holding period = 1000 x 11% + (1000-1130) /2 =45 HPY = 45/(1000+1130)/2 = 4.23%
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