Question

Suppose you buy a 7.8 percent coupon bond today for $1,080. The bond has 5 years to maturity.

               

a.	What rate of return do you expect to earn on your investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

           

Rate of return

%

          

b.	Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

     

Price

$

Answer 1

a

K = N

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

k=1

K =5

1080 =∑ [(7.8*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^5

k=1

YTM% = 5.91

b

K = N

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

k=1

K =3

Bond Price =∑ [(7.8*1000/100)/(1 + 7.91/100)^k]     +   1000/(1 + 7.91/100)^3

k=1

Bond Price = 997.16