Suppose you buy a 8.4 percent coupon bond today for $1,110. The bond has 8 years

Question

Suppose you buy a 8.4 percent coupon bond today for $1,110. The bond has 8 years to maturity.

What rate of return do you expect to earn on your investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

What is the annual realized yield on your investment? (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Suppose you buy a 8.4 percent coupon bond today for $1,110. The bond has 8 years to maturity.

Explanation / Answer

Let face value be$1000

Bond price =C*(PVIFA@YTM,n)+FV*(PVIF@YTM,n)

$1110=84*(PVIFA@YTM,8)+1000(PVIF@YTM ,80)

By trial and error method,

At YTM=6%,the right hand side of the equation is 1114.60

At YTM=7%, the right hand side of the equation is 1000

ByInterpolation,

6%+(1114.60-1110)/(1114.60-1000)

6%+0.040%=6.040%

b. Let face value be$1000

Bond price =C*(PVIFA@YTM,n)+FV*(PVIF@YTM,n)

                   =84*(PVIFA@4.040,8)+1000(pvif@4.040,8)

                  =84*6.9648+1000*0.657

                =$1242.0432

Holding period return= (Income+p1-p0)/p0

                                    =(80+1242.0432-1110)/1110

                                    =0.1910 or 19.10%

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