Suppose that today you buy a 6% coupon bond for $820. The bond pays coupons semi

Question

Suppose that today you buy a 6% coupon bond for $820. The bond pays coupons semiannually and has 15 years to maturity. (a) (4 points) What rate of return do you expect to earn on your investment? (b) (8 points) Five years from now, the YTM on your bond is expected to rise by 2%, and you plan to sell the bond in five years. What is the holding period yield (HPY) on your investment? (Note that if you sell the bond before it matures, your realized return is called the HPY). If you could put all the formulas and step by step process for your answers, that would be so helpful!!!

Explanation / Answer

Rate of return expected on investment as it pays semi annually = (1+r)^2 -1= 1.03^2 -1 = 6.09% Closing Value of bond = 820*3%/(3.045%) = 807.88 Holding period return = Income+ (End of period value- begenning value) /investment = (49.2*5)+(820-807.88) /820 *100 = 31% for 5 years

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