4. Suppose you have a 9% annual coupon bond selling for $950 with three years un

Question

4. Suppose you have a 9% annual coupon bond selling for $950 with three years until maturity and face value equal to $1,000. Furthermore, suppose the interest rates in the next three years are known (with certainty) to be ri 8%, r,-10.5% and r3 13% a) What is the bond's current yield? b) Calculate the bond's yield to maturity c) What is the holding period return on your initial investment after the bond matures? d) What is the bond's realized compound yield? Consider a 10% semi-annual coupon bond with a face value of $1,000 that has three years to maturity. Suppose the 6-month market interest rate is 4% a) What is the price of the bond today? b) Suppose six months has passed and the market interest rate is still 4%. What is the bond's 5. price in six months c) Based on your answers to parts a and b, what is the total six-month return to holding the bond

Explanation / Answer

4) a. Current Yield = Annual Coupon / Current Price = 9% x 1000 / 950 = 9.47%

b. Yield to Maturity can be calculated using I/Y function on a financial calculator

Insert N = 3, PMT = 90, PV = -950, FV = 1000 => Compute I/Y = 11.05% is the yield to maturity

c. Holding Period Return (HPR) = (P3 - P0 + 3 x C) / P0 = (1000 - 950 + 3 x 90) / 950 = 33.68%

d. Realized compounded yield = YTM = 11.05%

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