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 bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon rate of 11 percent for $1,200. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-2. What is the HPY on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: Yield to Maturity (Return) = 9.04% , Value of the Bond in 2 years = $ 1656.71

Explanation:

Calculating the expected return (yield to maturity)

Future value = $1000

Price = $1200

Coupon = $110 (1000×11/100)

N (number of period) = 19 years

yield to maturity = (C + (Fv - P)÷N) / ((Fv+P)÷2)

yield to maturity = (110 + (1200 - 1000)÷19) / ((12000+1000)÷2)

yield to maturity = (99.47368421)/1100 = 0.090430622

yield to maturity = 9.04%

Calculating value of the bond in two years

Price = $1200

Coupon (Pmt) = $110 (1000×11/100)

N (number of periods) = 2 years

R (YIELD TO MATURITY) = 9.04%

Future Value of a bond = Future Value of the price + Future value of the annuity

FV = P(1+R)^n + (Pmt × (1+R)^2 - 1)/ R

FV = 1000(1 + 0.0904)^2 + 110(1 +0.0904)^2 - 1)/0.0904

FV = 1426.766592 + 229.944

FV = 1656.710596

FV = 1656.71

the selling price of the bond will be $ 1656.76