with a face value of SI Suppose zero-coupon (discount) bond, years, has a curren
ID: 1132455 • Letter: W
Question
with a face value of SI Suppose zero-coupon (discount) bond, years, has a current price of $64 00 and that matures in two What is the yield to maturity of this bond? Suppose in a year from now the yield to maturity on this bond is 11.111 What would the price of this bond be? (Hint: in a year from now, the bond wil be a one year bond). What is the realized rate of return from the current period to one year from now? a. b. % c. Consider a consol with an annual coupon payment of $100 has a current price of $1000. What is the yield to maturity of this bond? Suppose in a year from now the yield to maturity on this bond is 5%, what would the price of this bond be? What is the realized rate of return from the current period to one year from now? a. b. c.Explanation / Answer
(Question 1)
(a) If yield to maturity (YTM) be R, then
$64 x (1 + R)2 = $100
(1 + R)2 = $100/$64 = 1.5625
Taking square roots on both sides,
1 + R = 1.25
R = 0.25 = 25%
(b) If bond price aftr one year be $P, then
P x 1.1111 = $100
P = $100/1.1111 = $90
(c) Realized rate of return = ($90/$64) - 1 = 1.40625 - 1 = 0.40625 = 40.625%
(Question 2)
(a) YTM for consol = Annual coupon / Current price = $100/$1000 = 0.1 = 10%
(b) Bond price after 1 year = Annual coupon / YTM = $100/0.05 = $2000
(c) Realized return after 1 year = ($2000/$1000) - 1 = 2 - 1 = 1 = 100%
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