You buy a bond with a 8 current maturity. The coupon rate is 8% at a current yie

Question

You buy a bond with a 8 current maturity. The coupon rate is 8% at a current yield of 6%, planning to hold the bond for 6 years. Suppose the yields increase by 50 Basis Points right after the purchase and stay at that level for the rest of the period. What is the bond price when you buy the bond? What is the bond price when you sell the bond? What is the total amount you'd have including the reinvested value of coupons plus the sale value of the bond when you do sell? What is the holding period return?

Explanation / Answer

Ans 1 Market Price(Present Value of the Bond) C*((1-1+r^-n)/r)+(P*(1+r^-n)) Where C=Coupon amount 80 r=Required rate(YTM) 6% P=Principal 1000 n=No of periods 8 Current Market Value                1,124.20 Ans 2 Market Price(Present Value of the Bond) C*((1-1+r^-n)/r)+(P*(1+r^-n)) Where C=Coupon amount 80 r=Required rate(YTM) revised 6.5% P=Principal 1000 n=No of periods 8 Current Market Value                1,091.33 Ans 3 Reinvested Value of coupons C*((1-1+r^-n)/r)                   487.10 Sale Value of the Principal (P*(1+r^-n))                   604.23 Total                1,091.33 Where C=Coupon amount 80 r=Required rate(YTM) revised 6.5% P=Principal 1000 n=No of periods 8 Holding Period Return Coupon Payment=80*6 480 Excess of sale value over purchase price 1091.33-1124 -32.67 Net Return 447.33

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