1-The YTM on a bond is the realized return you earn on your investment if you ho
ID: 2683024 • Letter: 1
Question
1-The YTM on a bond is the realized return you earn on your investment if you hold it to maturity. If you sell the bond before it matures, your realized return is known as the holding period yield (HPY).a. On 9/15/12 you buy $5000 face of GE 4% of 9/15/22 at a market price of 97.
b. Assume that in two years on 9/15/14, the YTM on your bond has declined by 1.5% (i.e., 150 basis points) and you decide to sell.
Use Excel YIELD and PRICE functions to find the bond's YTM on 9/15/12, the market price used when selling the bond on 9/15/14 at the new YTM, and the HPY of your investment for the period 9/15/12 - 9/15/14
2-On 9/15/12 you purchase a 10 year UST bond with a 4.25% coupon at par. On 3/15/15, the YTM is 3.9%. What is its MDURATION in both Sept 2012 and Mar 2015? Does its MDURATION change if its YTM is 4.5% on 3/15/15 instead of 3.9%?
Explanation / Answer
a. We have FV = $100, Buy price in 2012=PV=97, Coupon 4%, So PMT = 4%*FV = 4%*100 = 4 So Yield = YIELD(settlement,maturity,rate,pr,redemption,frequency,basis) ie Yield =YIELD(9/15/12,9/15/22,4%,97,100,1,0) = 4.38%. Thi sis Yield on 9/15/12. b. New Yield = 4.38% -1.5% = 2.88% Mkt price on 9/15/2014 = PRICE(settlement,maturity,rate,yld,redemption,frequency,basis) =Price(9/15/12,9/15/14,4%,2.88%,100,1,0) ie Price = $102.15 HPY = {[Income + (End of epriod Value-Initial Value))/Initial Value]^(1/No of yrs)} -1 So Inocme per year = 5000*4% = 200. Period is 2 Yrs So HPY = ((200*2 + 50*(102.15-97))/(50*97))^(1/2) - 1 = -63.18% 2.Yield = YIELD(settlement,maturity,rate,pr,redemption,frequency,basis) ie Yield =YIELD(9/15/12,9/15/22,4.25%,100,100,1,0) = 4.25%. MDURATION(settlement,maturity,coupon,yld,frequency,basis) In Sep12, MDuration = MDURATION(9/15/12,9/15/22,4.25%,4.25%,1,0) = 8.01 Mduration is linked to Settlement date. Remaining parameters wont change with time but are as on Issue date of Bond. So Mduration will not change in 2015 or with change in yield
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.