Question

4. A six-year bond with face value 100 and 4% coupon has a yield-to-maturity of 4.4%. You have a 1-year horizon and expect the bond’s y-t-m to increase to 5% next year. What is your expected ROR? (Please show work)

Answer 1

Price of the bond=Par value*Coupon rate/ytm*(1-1/(1+ytm)^n)+Par value/(1+ytm)^n

Purchase price=100*4%/4.4%*(1-1/1.044^6)+100/1.044^6=97.9301774

Selling price=100*4%/5%*(1-1/1.05^5)+100/1.05^5=95.67052333

ROR=(Selling Price+Coupon)/Purchase price-1=(95.67052333+100*4%)/97.9301774-1=1.7771%