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).

Suppose that today you buy a bond with an annual coupon of 12 percent for $1,140. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.

Suppose that today you buy a bond with an annual coupon of 12 percent for $1,140. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

a)

b)

1 Face value (FV) $                                      1,000 2 Coupon rate 12.00% 3 Number of compounding periods per year                                                   1 1*2/3 Interest per period (PMT) $                                    120.00 Bond price (PV) $                              (1,140.00) 4 Number of years to maturity 19 5 = 4*3 Number of compounding periods till maturity (NPER)                                                19 Bond expected rate of return RATE(NPER,PMT,PV,FV) Bond expected rate of return 10.29%

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