Question

Please Answer ALL PARTS To The Question!!!

2. Suppose you buy a 8.2 percent coupon band today for ny 41,093.00. The band has a face value of $1,000, 17 years. til maluty, and pays in kenest semi-annually when you initially purchase the bond, what rate of rerum CYTM) do you expect to vam on your Threstorant? DIDE rive years after purchasing the band you deade to sell it. At that time, the YTM on your band has decreased by 10 basis points (0,10%), what price shald the band sell for? what is the realized yield on your investment?

Answer 1

YTM is calculated using RATE function in Excel with these inputs :

nper = 17*2 (17 years to maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 8.2% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -1043 (current bond price . This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE is calculated to be 3.87%. This is the semiannual YTM. To calculate the annual YTM, we multiply by 2. Annual YTM is 7.74%

A1 x fc =RATE(17*2,1000*8.2%/2,-1043, 1000)*2 D E F G B C ДА 117.74%

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 7.04%/2 (Semiannual YTM of bonds = annual YTM / 2. YTM after 5 years = initial YTM - 0.70% = 7.74% - 0.70% = 7.04%)

nper = 12 * 2 (12 years remaining until maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 8.2% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,092.94

A2 =PV(7.04%/2,12*2,1000*8.2%/2, 1000) в с о Е F G 2 ($1,092.94)!

Realized yield is calculated using IRR function in Excel :

Cash outflow at time 0 = purchase price of bond = $1043

Cash inflow from time 1 to time 9 = semiannual coupon payment = $1000 * 8.2% / 2 = $41

Cash inflow at time 10 = semiannual coupon payment + sale price of bond = $41 + $1,092.94 = $1,133.94

IRR is calculated to be 4.32%. This is the semiannual realized return. To get annual realized return, we multiply by 2.  

Annual realized return = 8.65%

4 Time cash flow 0 $(1,043.00) 1 $ 41.00 2 $ 41.00 3 $ 41.00 4 $ 41.00 5 $ 41.00 6 $ 41.00 7 $ 41.00 8 $ 41.00 9 $ 41.00 10 $ 1,133.94 8.65%| 16 IRR

A 4 Time 50 6 1 72 83 94 10 5 cash flow -1043 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 =1000*8.2%/2 = (1000*8.2%/2)+1092.94 IRR(B5:B15)*2 11 6 127 13 8 149 15 10 16 IRR