Question

The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a.

Suppose that today you buy a bond with an annual coupon of 10 percent for $1,120. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 8.63%

b-1.	Two years from now, the YTM on your bond has declined by 1 percent and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-2.	What is the HPY on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a. Suppose that today you buy a bond with an annual coupon of 10 percent for $1,120. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment?

Rate of return = 8.63%

b-1. Two years from now, the YTM on your bond has declined by 1 percent and you decide to sell. What price will your bond sell for?

New YTM = 8.63% - 1% = 7.63%

Price of Bond after 2 years = $1207.65

b-2. What is the HPY on your investment

HPY = 12.61%

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