A two-year bond with par value $1,000 making annual coupon payments of $108 is p

Question

A two-year bond with par value $1,000 making annual coupon payments of $108 is priced at $1,000.

A two-year bond with par value $1,000 making annual coupon payments of $108 is priced at $1,000 a. What is the yield to maturity of the bond? (Round your answer to 1 decimal place.) Yield to maturity 10.8 % b. What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8.8%, (b) 10.8%, (c) 12.8%?(Do not round intermediate calculations. Round your answers to 2 decimal places.) Interest Rate 8.8% 10.8% 12.8% Realized YTM 10.8%

Explanation / Answer

At 8.8%

Proceeds = 1000 + 108 + 108*(1+8.8*%) = 1225.50

YTM = SQRT(1225.50/1000) - 1 = 10.7%

At 10.8%

Proceeds = 1000 + 108 + 108*(1+10.8*%) = 1227.66

YTM = SQRT(1227.66/1000) - 1 = 10.8%

At 12.8%

Proceeds = 1000 + 108 + 108*(1+12.8*%) = 1229.82

YTM = SQRT(1229.82/1000) - 1 = 10.9%

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