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 van before it matures, your realized return is known as the holding period yield. Suppose that today you buy a bond with an annual coupon of 9% for $1180. The band has 17 years to maturity. What rate of return do you expect to earn on your investment?

two years from now, the white TM on your bond has declined by 1%, and you decide to sell. What price will your van sell for?

what is the HPY on your investment?

Answer 1

rate of return

K = N

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

k=1

K =17

1180 =∑ [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^17

k=1

YTM% = 7.14

Holding period yield

K = N

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

k=1

K =15

Bond Price =∑ [(9*1000/100)/(1 + 6.14/100)^k]     +   1000/(1 + 6.14/100)^15

k=1

Bond Price = 1275.25

HPY = ((selling price+coupon payment for 2 years)/purchase price-1)*100

=(1275.25+2*90)/1180-1)*100=23.33%