Question

The yield to maturity of a 10-year 4% annual coupon bond is 4%.

a.Suppose that you buy the bond today and hold it for 10 years.Assume that the interest rates go up to 5% (100 basis points increase) after the bond is purchased and before the first coupon is received. What is yourrealized rate of return?

b.Suppose that you buy the bond today and hold it for 6years.Assume that the interest rates go up to 5% (100 basis points increase) after the bond is purchased and before the first coupon is received. What is yourrealized rate of return?

Answer 1

Coupon rate and yield to maturity is same, therefore the bond price is equal to the face value=$1000

a. Use PV function to find the price of the bond

=PV(rate,nper,pmt,fv,type)

rate=5%

nper=10 years

pmt=coupon rate*face value=4%*1000=40

fv=face value=1000

=PV(5%,10,40,1000,0)=$922.78

The realized rate of return=(922.78-1000)/1000=-7.72%

b. nper=6 years and other inputs remains same

=PV(5%,6,40,1000,0)=$949.24

The realized rate of return=(949.24-1000)/1000=-5.07%