The YTM on a bond is the interest rate you eam on your investment if interest ra

Question

The YTM on a bond is the interest rate you eam 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 6 percent for $1,080. The bond has 13 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded 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 sel for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bond price b2. What is the HPY on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.]) HPY

Explanation / Answer

a) Rate of return can be calculated using I/Y function.

N = 13, PV = -1080, FV = 1000, PMT = 6% x 1000 = 60 => Compute I/Y = 5.14%

b) Bond Price two years later when

I/Y = 5.14% - 1% = 4.14%, N = 13 - 2 = 11, PMT = 60, FV = 1000 => Compute PV = $1,161.62

c) HPY = (P1 - P0 + PMT x 2) / P0 = (1161.62 - 1080 + 2 x 60) / 1080 = 18.67%

d) Real rate = nominal rate - inflation = 9% - 5.4% = 3.6%

Annual deposit can be calculated using PMT function

N = 40, I/Y = 3.6%, FV = 6,000,000, PV = 0 => Compute PMT = $69,337.60

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