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Requirement 1: Suppose that today you purchase an semiannual coupon bond with a coupon rate of 7 percent and the remaining maturity of 10 years.
Requirement 1: Suppose that today you purchase an semiannual coupon bond with a coupon rate of 7 percent and the remaining maturity of 10 years. Currently, the market interest rate for bonds like yours, quoted as YTM, is 7.8 percent. What price do you pay for the bond? Bond Price: $1 Requirement 2: Two years passes. Then, you sell the bond on the market for $1,218. 16. What is the YTM of the bond when you sell it? (A bond's Yield to Maturity is the rate of return an bond holder will earn on a bond if he holds the bond to its maturity) Yield to Maturity: % Requirement 3: In finance, we know that IRR (internal rate of return) is the discount rate that makes the present value of all future cash flows equal to the intial investment cost. We usually use IRR to measure the performance of an investment that produces multiple cash flows during the holding period. Now looking at your two-year investment in the bond, what is the rate of return, quoted like APR, you have earned on your bond investment? Rate of Return: % Requirement 4: You want to compare the return on this semiannual coupon bond with the return on the other annual coupon bond. For this purpose, you would use the effective annual return. What is the effective annual return on your two-year bond investment? Effective Annaul Rate: % Requirement 5: You relize that the annual inflation rate over the two years of your bond investment is 3.5 percent. What is the real rate of return implied in the effective annual return that you have earned on your bond investment? As a professional investor, you want to have a real rate of return as accurate as possible in two demical places. Real Rate of Return: %
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