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

Question

The TYM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually see the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a 7 percent annual coupon bond for $1,160. The bond has 15 years to maturity. What rate of return do you expect to earn on your investment? b. 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? c. What is the Holding Period Yield on your investment?

Explanation / Answer

(a)

1160= 70PVIFA(Kd,15)+1000PVIF(Kd,15)

Kd= 5.41%

(b)

P= 70PVIFA(4.41%,13)+1000PVIF(4.41%,13)

Price= $1252.17

(c)

Holding Period Yield on your investment=[( 1252.17-1160)/1160]x2= 15.891%

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