Suppose you buy a 10 percent coupon bond today for $1,110. The bond has 8 years
ID: 2745089 • Letter: S
Question
Suppose you buy a 10 percent coupon bond today for $1,110. The bond has 8 years to maturity.
What rate of return do you expect to earn on your investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
What is the annual realized yield on your investment? (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
a.
What rate of return do you expect to earn on your investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Answer 1.
Face Value = $1,000
Coupon = $100
Current Value = $1,110
N = 8 years.
1,110 = 100*(1-(1/(1+i))^8)/i + 1,000/(1+i)^8
I = 8.08%
Answer b-1.
YTM = 10.08%
Value = 100*(1-(1/1.1008)^6)/0.1008 + 1,000/1.1008^6
Value = $1,342.94
Answer b-2.
Bond is sold for the gain of 20.99% ((1,342.94-1,110)/1,110 *100)
Gain per Year = 10.495%
Plus there is a dividend payment of 4%. Sol annual realized yield = 14.50% (10.50% + 4%)
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