A three-year bond has a coupon rate of 8% and is priced at $950.26. The face...

A three-year bond has a coupon rate of 8% and is priced at $950.26. The face value is $1,000 and the bond pays annual coupons.

Calculate the realized (annualized) compound YTM on the bond if the one-year interest rate (with certainty) over the next three years will be, r1 = 8%, r2 = 10%, and r3 = 12%. You buy the bond today and hold it until maturity.

[Note: Assuming today is t = 0 and t = 1 is one year from today, r1 represents the interest rate for the period, t = 0 to t = 1. Similarly, r2 represents the interest rate for the period, t = 1 to t = 2, and r3 represents the interest rate for the period t = 2 to t = 3.]

Expert Solution

Calculate the realized (annualized) compound YTM on the bond

=((8%*1000*1.1*1.12+8%*1000*1.12+8%*1000+1000)/(950.26))^(1/3)-1
=10.0974%

jeff jeffy answered 2 years ago

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