Question
Use (=Rate) or (PV/FV) formula in excel if necessary 1.a) Two years ago you bought a 10-year 9% coupon bond for $1,150 (annual coupon payments).
Use (=Rate) or (PV/FV) formula in excel if necessary
1.a) Two years ago you bought a 10-year 9% coupon bond for $1,150 (annual coupon payments). Par = $1000. What was the bonds YTM (yield to maturity) at the time of your purchase? (Show your answer in % and round to two decimal places (e.g xx.xx%).)
1.b) Two years later (today), the YTM on your bond has declined by 1%, and you decide to sell the bond. How much can you sell the bond for? (Show your answer in $ and round to two decimal places ($xxx.xx))
1.c) Based on your answers in Q1 and Q2, what is your annualized holding period yield/return of this bond investment?
Show your answer in % and round to two decimal places (xx.xx%).
Hint:
Here are the CFs associated with this bond investment:
- Paid $1150 for the bond two years ago
- Collected a 9% annual coupon ($1000 par) for two years
- Exit the position two years later by selling the bond for $xxx (your answer in Q2).
The annualized return is basically the r that sets the initial purchase price ($1150) as the PV of future CF's associated with this investment, including: (i) coupons collected during the 2-year holding period; and (ii) the exit sale price at the end of the 2-year holding period.
Draw a timeline and show the cash flows, and then use Excel's "rate" function to find the answer.
2.) Is your answer in Question 3 the same as your answer in Q1? Why?
Group of answer choices
Yes, HPY (holding period yield) is always the same as the bond's YTM even if we sell the bond before maturity
No, the HPY is greater than the bond's YTM at the time of purchase b/c interest rates have declined during the holding period
No, the HPY is less than the bond's YTM at the time of purchase b/c interest rates have increased during the holding period
3.) Repeat Q2-Q3, but now assume the bond's YTM has remained the same during the two-year holding period. Under the revised assumption, is your HPY of the bond investment the same as the bond's initial YTM (i.e. YTM at the time of the purchase)?
Group of answer choices
Yes, HPY = Initial YTM b/c interest rates have not changed during the holding period.
No, the HPY is still different from the initial YTM even if interest rates have remained the same
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