CH. 7,#10 The YTM on a bond is the interest rate you earn on your investment if

Question

CH. 7,#10

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 8 percent for $1,170. The bond has 16 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded 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 answer to 2 decimal places, e.g., 32.16.)

Suppose that today you buy a bond with an annual coupon of 8 percent for $1,170. The bond has 16 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Face value (FV) $                                        1,000 Coupon rate 8.00% Number of compounding periods per year                                                    1 Interest per period (PMT) $                                        80.00 Bond price (PV) $                               (1,170.00) Number of years to maturity 16 Number of compounding periods till maturity (NPER)                                                  16 Expected rate of return RATE(NPER,PMT,PV,FV) Expected rate of return 6.28% 1 Face value (FV) $                                         1,000 2 Coupon rate 8.00% 3 Number of compounding periods per year 1 4 = 1*2/3 Interest per period (PMT) $                                               80 5 Number of years to maturity 15 6 = 3*5 Number of compounding periods till maturity (NPER) 15 7 Market rate of return/Required rate of return 5.28% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 5.28% Bonds price at the end of year PV(RATE,NPER,PMT,FV)*-1 Bonds price at the end of year $                                   1,277.06 Holding period return 15.99% (1277.06+80-1170)/1170

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