The YTM on a bond is the interest rate you earn on your investment if interest r

Question

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).

Requirement 1:

Suppose that today you buy an annual coupon bond with a coupon rate of 8.4 percent for $825. The bond has 8 years to maturity. What rate of return do you expect to earn on your investment?

Requirement 2:

Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell.

(a) What price will your bond sell for?

(b) What is the HPY on your investment?

Explanation / Answer

Requirement 1:

Requirement 2:

3)

Holdinhg period return:

= ($893.54-$825)/$825+8.4%

= 16.7%

Face value (FV) 1,000 Coupon rate 8.40% Number of compounding periods per year 1 Interest per period (PMT)                                           84.00 Bond price (PV) -                                   825.000 Number of years to maturity 8 Number of compounding periods till maturity (NPER) 8 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Expected return 11.91% RATE(8,84,-825,1000)

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