Question

5. An investor is interested in purchasing a 30-year U.S. government bond carrying an 8 percent coupon rate. The bond’s current market price is $935 for a $1000 par value instrument. Suppose the investor sells the bond at the end of 13 years for $970. What is the holding-period yield? What is the effective yield?

Answer 1

Answer:

Holding period yield is 114.97%

effective yield is 8.72%

Explanation:

holding period yield=(Price at call-initial price+coupon payments)/initial price

                                =($970-$935)+(13*$80)/$935

                                 =($35+$1040 )/$935

                                 =$1075/$935

                                  =114.97%

The effective yield is the yield to call which can be computed using the excel rate formula:

=rate(nper,pmt,-pv,fv)

nper is the number of payments before the call which is 13

pmt is the periodic payment by bond which is $1000*8%=$80

pv is the current market price of $935

fv is the bond price at end of 13 years at $970

=rate(13,80,-935,970)

rate=8.72%