In: Finance
Suppose your investment horizon is 5 years. You today buy a 10- year coupon bond with coupon rate 7%, paid once a year. The term structure today is flat at 4%.
a. What is the bond’s price?
b. Suppose you expect that the term structure will remain flat at 4% for the next six years. What is your expected realized yield?
c. Now suppose that immediately after you bought the bond, the term structure falls to 3% and you expect it to stay at 3% for the next six years. How did this change affect your expected realized yield?
Hello Sir/ Mam
(a) Bond price today = $1,243.33
n = 10, coupon = 70, future value = 1000, YTM = 4%
Using excel function,"=PV(4%,10,-70,-1000,0)", we get that the Present Value = $1,243.33
(b) Realised Yield = 4%
n = 5, coupon = 70, future value = 1000, YTM = 4%
Using excel function,"=PV(4%,5,-70,-1000,0)", we get that the Present Value = $1,133.55
Hence,
PMT = 70, future value = 1133.55, n = 5, pv = 1243.33
Using excel function,"=RATE(5,70,-1243.33,1133.55,0)", we can get that the Yield = 4%
(c) Realised Yield = 4.75%
n = 5, coupon = 70, future value = 1000, YTM = 3%
Using excel function,"=PV(3%,5,-70,-1000,0)", we get that the Present Value = $1,183.19
Hence,
PMT = 70, future value = 1183.19, n = 5, pv = 1243.33
Using excel function,"=RATE(5,70,-1243.33,1183.19,0)", we can get that the Yield = 4.75%
I hope this solves your doubt.
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