You will earn the YTM on a bond if you hold the bond until maturity and if inter

Question

You will earn the YTM on a bond if you hold the bond until maturity and 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 rate of 6 percent for $1,010. The bond has 15 years to maturity. What rate of return do you expect to earn on your investment?

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?

b2. What is the HPY on your investment?

Explanation / Answer

a) YTM = Interest + [(Face value -Current Price)/n] / (Face value +Current Price)/2
=(1000*6%) + [(1000-1010)/15] / (1000+1010)/2
=60 + (-0.6667) / 1005
=59.3333/1005
=5.9%

b)  Price of bond after 2 year = Interest *PVIFA(4.9%,13) + Redemption value *PVIF(4.9%,13)
=60*(9.450383) + 1000(0.536931)
=567.023 + 536.9312
=1103.954$

c) HPY on your investment = 1103.954-1010/ 1010

= 9.302% for 2 years

=4.651 % pa

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