Question

Suppose you purchase a 20-year treasury bond with a 6% annual coupon ten years ago at par. Today the bond's yield to maturity has risen to 8% (EAR).

- If you hold this bond to maturity, the internal rate of return you will earn on your investment will be closest to:

A) 5.0%.

B) 5.6%.

C) 6.0%.

D) 8.0%.

E)  9.0%

- If you sell this bond now, the internal rate of return you will earn on your investment will be closest to:

A) 5.0%.

B) 4.9%.

C) 6.0%.

D) 8.0%.

E)  7.9%

- Consider a bond that pays annually an 8% coupon with 20 years to maturity. The amount that the price of the bond will change if its yield to maturity increases from 5% to 7% is closest to:

A) -$270.

B) -$225.

C) -$310.

D) -$250.

E) -$800

Answer 1

1. C) 6.0%

2. B) 4.9%

3. A) -$270

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -