The YTM on a bond is the interest rate you earn on your investment if interest r
ID: 2749787 • Letter: T
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).
a. Suppose that today you buy a bond with an annual coupon of 8 percent for $1,170. The bond has 16 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Expected rate of return %
b1. 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Bond price $
b2. What is the HPY on your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
HPY %
Explanation / Answer
Face value (FV) $ 1,000.00 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) 80.00 Bond price (PV) $ (1,170.00) Number of years to maturity 16 Number of compounding periods till maturity (N) 16 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Bond Yield to maturity 6.28% Face value (FV) $ 1,000 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) $ 80.00 Number of years to maturity 14 Number of compounding periods till maturity (NPER) 14 Market rate of return/Required rate of return 6.28% Market rate of return/Required rate of return per period (RATE) 6.28% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $ 1,157.14 Holding period yield (HPY) 12.58% (1157.14+80*2-1170)/1170
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