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 8 percent for $1,030. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. 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? b2. What is the HPY on your investment?

Explanation / Answer

a.

Expected rate of return is given by YTM formula im excel =rate(nper,pmt,pv,fv) where nper =17, pmt= 0.08*1000 =80, pv= 1030 and FV =1000.

Hence rate of return = rate(17,80,-1030,1000) = 7.678% = 7.68

b.

Price of the bond at sale = pv(rate,nper,pmt,fv) . The YTM = 6.678% and nper =15.

Hence price = pv(0.0678,15,80,1000) = $1122.68

c.

Holding period return = 1030 + 80+80-1122.68 = 67.32. The rate of return = 67.32/1030 =0.0654 =6.54%

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