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dsp73
3 years ago
8

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 of 7 percent for $1,060. The bond has 21 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-. 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.)
Mathematics
1 answer:
AURORKA [14]3 years ago
8 0

Answer / Step-by-step explanation:

(a) The rate of return you expect to earn if you purchase a bond and hold it until maturity is the YTM.

If we recall the bond price equation for this bond is, we have

P0 = $1,060 = $100(PVIFAR%,21) + $1,000(PVIFR%,21)

Using a spreadsheet, financial calculator, or trial and error we find:

R = YTM = 9.42%

b) To find our HPY, we need to find the price of the bond in two years. The price of the bond in two years at the new interest rate, will be:

P2 = $100 (PVIFA 8.42%,17) + $1,000(PVIF 8.42%,17)

Therefore,  P2 = $1,139.6

(b2) To calculate the HPY, we need to find the interest rate that equates the price we paid for the bond with the cash flows we received. The cash flows we received were $100 each year for two years and the price of the bond when we sold it. The equation to find our HPY is therefore:

P0 = $1,060 = $100(PVIFAR%, 2) + $1,139.69(PVIFR%, 2)

Solving for R, we get:

R = HPY = 13.52%

Therefore,  the realized HPY is greater than the expected YTM when the bond was bought because interest rates dropped by 1 percent; bond prices rise when yields fall.

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So the answer choices are
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even=not odd
not even=odd so choice 5 is really a-b=odd
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the problem said that a and b are odd so therefor choice2 is wrong and choice 3 is correct

then both are odd
odd-odd=even because
an even number is represented as 2n where n is an integer
an odd number can be represented as 2n+1 so assume you have 2 odd numbers 2 away from each other so odd and (odd+2)
odd+2-odd=2n+1+2-(2n+1)=2n+1+2-2n-1=2n-2n+1-1+2=2
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so odd-odd=even, it depends on weather you consider 0 odd or even


so the asnwers are:
a and b are odd
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