In: Finance
We would like to invest 1 000 000 USD and we have two bonds in our portfolio such as:
A….maturity = 5, coupon rate = 0 %, YTM = 10 %, FV = 100 USD
B…maturity = 2, coupon rate 12 %, YTM = 12 %, FV = 100 USD
What would be the yield of this portfolio when investment horizon is 3 years and
WA=0,36 and WB=0,64
It is assumed that coupon payments of bond B are annual.
Yield n the question refers to current yield and YTM.
Current yield = Annual coupon/ Current price.
Bond A, being zero coupon bond, has zero current yield.
Price of both the bonds in 5 different scenarios are calculated using the PV function of Excel.
Details of price and current ratio in each of the scenarios are as follows:
Portfolio yield is the weighted average of the constituent bonds. The results are as follows: