Suppose you buy a 7 percent coupon bond today for $1,130. The bond has 9 years t
ID: 2741075 • Letter: S
Question
Suppose you buy a 7 percent coupon bond today for $1,130. The bond has 9 years to maturity.
What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
a.
What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
a.
1130 = 70/(1+i) + 70/(1+i)^2 + 70/(1+i)^3 + 70/(1+i)^4 + 70/(1+i)^5 + 70/(1+i)^6 + 70/(1+i)^7 + 70/(1+i)^8 + 1070/(1+i)^9
i = 0.0516 = 5.16%
b. two years from now, so the time to maturity = 7years
YTM = 7.16% = 0.0716
Selling price = 70/(1+0.0716) + 70/(1+0.0716)^2 + 70/(1+0.0716)^3 + 70/(1+0.0716)^4 + 70/(1+0.0716)^5 + 70/(1+0.0716)^6 + 1070/(1+0.0716)^7
= 991.524
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