The yield-to-maturity on a bond is the interest rate you earn on your investment
ID: 2521982 • Letter: T
Question
The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change If you a is known as the holding period yield Suppose that today y yleld-to-maturity has declined to 7 percent and you decide to selli What is your holding period yield? - 1283 percent ctually sell the bond before it matures, your realzed return a 9 percent annual coupon bond for $1,000. The bond has 12 years to maturity Three years from now, the 9.49 percent 13.01 percent 10.96 percent 8 84 percentExplanation / Answer
Price of the bond when it was sold.
Price of the bond could be calculated using below formula.
P = C* [{1 - (1 + YTM) ^ -n}/ (YTM)] + [F/ (1 + YTM) ^ -n]
Where,
Face value = $1000
Coupon rate = 9%
YTM or Required rate = 7%
Time to maturity (n) = 9 years
Annual coupon C = $90
Let's put all the values in the formula to find the bond current value
P = 90* [{1 - (1 + 0.07) ^ -9}/ (0.07)] + [1000/ (1 + 0.07) ^9]
P = 90* [{1 - (1.07) ^ -9}/ (0.07)] + [1000/ (1.07) ^9]
P = 90* [{1 - 0.54393}/ 0.07] + [1000/ 1.83846]
P = 90* [0.45607/ 0.07] + [543.93351]
P = 90* 6.51529 + 543.93351
P = 586.3761 + 543.93351
P = 1130.
So price of the bond is $1130.31
Bond was purchased for 1000
Gain = 1130.31 – 1000 = 130.
Holding period yield = 130/1000 = 13.01%
Correct option is C
--------------------------------------------------------------------------------------------------------------------------
Feel free to comment if you need further assistance J
Pls rate this answer if you found it useful.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.