Question

Suppose you buy a bond with a coupon of 7 percent today for $1,130. The bond has 9 years to maturity. Assume interest payments are reinvested at the original YTM.

a. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Rate of Return %:

b. Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price:

Answer 1

a. What rate of return do you expect to earn on your investment?

rate of return will e equal to the yield to maturity of the bond.

Thus Yield to maturity = 5.16%

b. Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for?

Yield after 2 years = current yield + 2% = 5.16% + 2% = 7.16%

Sale price after 2 years = $991.52