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 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 12 percent for $1,140. The bond has 19 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))***What is the Expected rate of return % ???*****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 final answer to 2 decimal places. (e.g., 32.16)****) b2. What is the HPY on your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

since 737/0.75 = 9826.666666 I said that was the present value of the bond... and then I assumed you'd receive 10,000 at maturity... Otherwise I can't see how to do it. Because it makes sense to say yourcoupon payment= the face * coupon rate... but if I assume that the 9826.6666 is the face that gets redeemed at maturity the YTM would be the coupon rate... So you can decide what you want to do....

So I used the Cash Flow worksheet on the BA-II Plus
Hit CF (next to 2nd) then hit 2nd then Clear to clear the worksheets....

So I put in my initial cost (CF0) was the -9826.666 (price to buy)
then hit enter
hit the down arrow... for C01= cash flow 1 = coupon payment = 737 hit enter and then down
F01 = frequency of the coupon = 16 (this is because it's easier to add the last coupon to the face of the bond for the last payment) hit enter and down
C02 = 10,000 + 737 = 10,737 hit enter

Now you have your cash flows set up.. you pay the bond price to receive the bond... receive the annual coupons... and then receive the face amount plus the last annual coupon at time 17.

Hit IRR which is 2 buttons right of CF which should be blank. Then hit the CPT (compute) button at the top left of the buttons and it should say 7.554413466 = 7.55% as your bond's YTM. Which is what one would expect if the PV(bond) = 9862... because if the YTM > coupon rate the Price is less than the face amount...

B). YTM = 7.55% - 1.40% = 6.15%
Price of bond = PV(coupon payments) + PV(face amount)
now I'm going to use the same Cash Flow tool.
Hit CF, Then 2nd and clear to clear the old memory
CF0 = 0 since there is no inital investment to be made you own the bond hit enter and down
CF1 = 737 hit enter and down
F01 = 12 = 17- 4 -1 since we lump the last coupon into the face to make discounting easier. Hit Enter and down arrow
C02 = 10737 Enter
Now press the NPV button next to CF
Enter your interest (I) as your YTM - 1.4% = 6.15 then hit enter and down. at the NPV screen hit CPT. It should be 11,070.6264. I verified this number using annuities, so the method works but it's still contingent on the assumptions from A.

C. Again hit CF, 2nd then Clear to clear the CF worksheets
CF0 = -9826.6666666
C01 = 737
F01 = 3
C02 = 11070.63 + 737 = 11,807.63
Then hit IRR and CPT for your answer of: 10.218 = 10.22


So if you decide that the face amount is the 9826.666 then you replace the 10,737 with 9826.666+737 as your maturity value in the calculations.

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