Question
1. 10.00 points 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). a. Suppose that today you buy a bond with an annual coupon of 8 percent for $1,060. The bond has 19 years to maturity. What rate of return do you expect to earn on your Investment? (Round your answer to 2 decimal places. (e.g., 32.16)) Expected rate of return _________ % b-1. 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Bond price $______________ b-2. What is the HPY on your investment? (Round your answer to 2 decimal places. (e.g., 32.16)) HPY 12.12%
Explanation / Answer
a. We have to calculate the YTM of the bond.
80 PVIFA(YTM,19)+1000PVIF(YTM,19)= 1060
YTM= expected rate of return= 7.4%
b. Price of bond in 2 years
P= 80PVIFA(6.4%,17)+1000PVIF(6.4%,17)
P= $1162.92
HPY
1060= 80 PVIFA(YTM,2)+1000PVIF(YTM,2)
HPY=YTM=4.78%
