If a bond\'s yield to maturity does not change, the return on the bond each year

Question

If a bond's yield to maturity does not change, the return on the bond each year will be equal to the yield to maturity. Confirm this for both a premium and a discount bond using a 4-year 3.3 percent coupon bond with annual coupon payments and a face value of $1,000. a. Assume the yield to maturity is 2.3 percent. What is the current value of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price today 1037.80 What will the bond value be in one year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price in one year1028.67 What is the rate of return for the first year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Rate of return b. Assume the yield to maturity is 4.3 percent. What is the current value of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price today 963.96 What will the bond value be in one year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price in one year972.41 What is the rate of return for the first year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Rate of return

Explanation / Answer

Rate of Return = [Coupon + (Price after 1 Year - Purchase Price) ] / Purchase Price

Return (with 2.3% YTM) = [33 + (1028.67 - 1037.80)]/1037.80 = 2.30% which is the same as the YTM

Return (with 4.3% YTM) = [33 + (972.41 - 963.96)]/963.96 = 4.30%

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