Suppose you buy a bond with a coupon of 7.2 percent today for $1,000. The bond h

Question

Suppose you buy a bond with a coupon of 7.2 percent today for $1,000. The bond has 10 years to maturity. 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? Assume that interest payments are reinvested at the original YTM. The bond pays coupons twice a year....Please explain in layman's terms and how I can get the answer...I understand the Explanation: Price when sold = $36(PVIFA4.6%, 16) + $1,000(PVIF4.6%, 16) = $888.4695 Future value of reinvested interest payments = $36(FVIFA3.6%, 4) = $151.9643 Realized return = ($888.4695 – 1,000 + 151.9643) / $1,000 = 4.04% .......but i am asking please let me know what all of that means and how I need to calculate it. Please dumb it down for me...I don't understand the PVIFA4.6%, 16, how do I calculate that or how do I enter it into my BAII calculator...Please make it make sense...Thank you in advance.

Explanation / Answer

You bond the bond at par value of $1000. When a bond is trading at par, coupon rate is equal to its YTM.

So, two years from now, yield to maturity will be increased by 2%, and years to maturity is reduced by two years.

Since it is a semiannual compounding, coupon, and YTM and divided by 2, and Years to maturity is multiplied by 2.

Input the following values in the financial calculator:

N = (10-2)*2 = 16

I/Y = (7.2%+2%)/2 = 4.6%

PMT = 0.072*1000/2 = 36

FV = 1000 (Par value)

CPT-> PV = 888.4695

So, the bond price after two years = 888.4695.

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