Question

You invest in a 5-year bond (par=$1,000) with a coupon rate of 6%. The interest is paid annually, and its YTM is 4%. If you sell the bond one year later, what is your holding period return?

	A.	4.0%
	B.	4.5%
	C.	5.1%
	D.	7.6%

You are evaluating a corporate bond issued by National Fishing League (NFL). The NFL bond is a 4-year bond with a par value of $1 million. Its interest (coupon) payments are based on the following schedule: $50,000 in year 1, $60,000 in year 2, $70,000 in year 3, and $80,000 in year 4. You estimate NFL’s current interest rate is 6%. What is the price of the bond (in $MM)?

	A.	$1.0149
	B.	$0.9893
	C.	$1.0381
	D.	$0.9965

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =5

Bond Price =∑ [(6*1000/100)/(1 + 4/100)^k]     +   1000/(1 + 4/100)^5

k=1

Bond Price = 1089.04

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*6/(100)

I/Y =4

N =5

FV =1000

CPT PV

Using Excel

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

=PV(4/(100),5,-6*1000/(100),-1000,)

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =4

Bond Price =∑ [(6*1000/100)/(1 + 4/100)^k]     +   1000/(1 + 4/100)^4

k=1

Bond Price = 1072.6

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*6/(100)

I/Y =4

N =4

FV =1000

CPT PV

Using Excel

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

=PV(4/(100),4,-6*1000/(100),-1000,)

rate of return/HPR = ((Selling price+Coupon amount)/Purchase price-1)

=((1072.6+60)/1089.04-1)

=4%

Bond
Discount rate	0.06
Year	0	1	2	3	4
Cash flow stream	0	50000	60000	70000	1080000
Discounting factor	1	1.06	1.1236	1.191016	1.262477
Discounted cash flows project	0	47169.81	53399.79	58773.35	855461.16
NPV = Sum of discounted cash flows
NPV Bond =	1014804.1		=1.0149m
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor