The YTM on a bond is the interest rate you earn on your investment if interest r

Question

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). Suppose that today you buy a 10 percent annual coupon bond for $1,164 88 The bond has 14 years to maturity. You expect to earn a rate of percent on your investment. (Do not include the percent sign (%). Round your answer to the nearest whole number, (e.g., 32)) Two years from now. the YTM on your bond has declined by 1 percent, and you decide to sell Your bond will sell for $ i (Do not include the dollar sign ($). Round your answer to 2 decimal places, (e.g., (32.16)) and the HPY on your investment is percent. (Do not include the percent sign (%). Round your answer to 2 decimal places, (e.g., 32.16))

Explanation / Answer

a. Cupon 10%, Current orice of Bond = PV=1164.88 Term = 14Yrs = nper As Current price is 1164.88, Face Value FV = $1000 So PMT = COupon*FV = 10%*$1000 = $100 So Rate =YTM= Rate(nper,PMT,PV,FV) = Rate(14,100,-1164.88,1000) = 8% ....Ans (a) b. YTM = Rate -1 = 8%-1% = 7% Period = 14-2 = 12 yrs = nper So Price of Bond = PV(rate,nper,PMT,FV) = PV(7%,12,-100,1000) = $1,238.28 ..Ans (b1) HPY = [Income + (End of period Bond price - Initial Bond price)]/Initial Bond price ie HPY = (12*$100 +(1000-1238.28))/1238.28 = 77.67%

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