You own a bond with an annual coupon rate of 6% maturing in two years and priced

Question

You own a bond with an annual coupon rate of 6% maturing in two years and priced at 85%. Suppose the probability S 2%, hat a maturit the bond wil de au and ou il receive only 45% of the promised payment. Assume a face value of $1,000 a. What is the bond's promised yield to maturity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Promised yield b. What is its expected yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected yield

Explanation / Answer

a. FV = 1000

PV = -850

PMT = 60

N = 2

use rate function in Excel

promised yield = 15.26%

b.

N = 2

PV = -850

PMT = 60

FV = 0.88*1000 + 0.15*450 = 934

Expected yield = 11.73%

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