Question

One year ago, you purchased a $1,000 face value bond at a yield to maturity of 9.45 percent. The bond has a 9 percent coupon and pays interest semiannually. When you purchased the bond, it had 12 years left until maturity. You are selling the bond today when the yield to maturity is 8.20 percent. What is your realized yield on this bond?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =12x2

Bond Price =∑ [(9*1000/200)/(1 + 9.45/200)^k]     +   1000/(1 + 9.45/200)^12x2

k=1

Bond Price = 968.11 = PURCHASE PRICE

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(9*1000/200)/(1 + 8.2/200)^k]     +   1000/(1 + 8.2/200)^11x2

k=1

Bond Price = 1057.26 = Selling price

rate of return = ((selling price+coupon)/purchase price-1)*100

=((1057.26+90)/968.11-1)*100=18.51%