Question

The YTM on a bond is the interest rate you earn on your investment if interest rates donâ t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). Suppose that two years ago, you bought a bond with an annual coupon rate of 7 percent, priced at $1,160 with 15 years to maturity, and $1000 par value. Since then the YTM of the bond has declined by 1 percent, and you decide to sell. What price will your bond sell for now? What is the HPY on this investment?

		$1,251; 9.8%
		$1,354; 10.2%
		$1,233; 11.2%
		$1,254; 10.5%

Answer 1

sell Price   =   1251 , and HPY    9.8%

lets find out the YTM of the Bond when initially purchased,

par value    FV =     1000

No. of years to maturity n =     15

coupon amt               PMT =    70     ( 1000 X 7%)

Bond Price                PV     = 1160

we find the YTM using the Rate function with above details.. the YTM is 5.41%

the excel formula,

after 2 years the yield has dropped by 1%

so the current YTM of the bond is 4.41%    ( 5.41-1.00)

for the current yield of 4.41 lets find the bond price- which will be the selling price,

and the number of year is now 13 - since 2 years has lapsed since purchase, now only 13 years left to maturity

so n   = 13

based on this YTM and n, we compute the Price of the bond using PV function

excel formulas are

since held for 2 years- we would have received coupon payment for 2 years   =70+70

Holding period yield     =   income during holding period + (selling value - buying value) /   buying value

                                      =   70+ 70 + (1251.61-1160) / 1160

                                  =   0.1997

but this for 2 years,

annualized HPY   =     ((HPR + 1) ^ 1/t) - 1.

                          = ((0.1997+1)^1/2 )    - 1

                       =        0.095291   or 9.53%