Suppose you buy a 7 percent annual coupon bond today for $960. The bond has 6 ye

Question

Suppose you buy a 7 percent annual coupon bond today for $960. The bond has 6 years to maturity. The face value of the bond is $1,000. What is the YTM of the bond? Assume that your investment horizon is equal to the duration of the bond. Two years from now, the YTM on your bond has decreased by 50 basis points. Then, what is the realized yield [holding period return] on your investment at the end of your investment horizon [Duration]? Also assume that the market interest rate has changed only once during your investment horizon. Assume that you reinvest the second coupon payment at the new interest rate

Explanation / Answer

Answer

Answer 1

                                    Interest + (Redemption price – current market price) / n

YTM = ……………………………………………………………………………………………………………………………………..

                                                     (Redemption price + current market price) / 2

= [(1000 * 0.07) + ( 1000 – 960) / 6 ] / ( 1000 + 960) /2

= [70 + (40) / 6] / (1960) /2

= [70 + 6.67] / 980

= 76.67 / 980

= 0.0782

So YTM =7.82 %

Answer 2

Note : Unable to find the realized yield because it is said that assume that your investment horizon is equal to the duration of the bond. I have calculated duration. It comes 5 years and maturity is 6 years there is doubt whether are you going to receive redemption value or not?

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