Question

2. You are considering purchasing a 10 year bond with a face value of $1000 with an annual coupon of $55.00. The current interest rate is 6%, what would you expect to pay for the bond? 3. What is the current yield on a 1 year bond $100 coupon bond which you pay $98.00 for with an annual coupon payment of $6.00. 4. Assuming the same coupon payment as listed in question 3 but now the price you pay for the bond increases to $101.00, what is the current yield, did it rise or fall? 5. Presume you purchased a 10 year year bond for $1,000, which has a face value of $1000.00. The bond pays an annual coupon of $60.00 and has an interest rate (Yeild to maturity) of of 6%. Presume you decide to sell the bond after 1 year for $1100.00. This means you sold a 9 year bond. Given the above information what is your holding period return? 6. Given the same information as listed in question 5, presume the yield to maturing increases to 7.3% and the bond price decreases to $945.00, what is the holding period return or loss? Is this a capital gain or loss?

Answer 1

Answer 2

PW of face value= 1000/(1+6%)^10=1000/1.06^10=1000/1.7908=$558.39

PW of coupon = A*(1-(1+r)^-n)/r

=55*(1-(1+6%)^-10)/6%

=55*(1-1.06^-10)/0.06

=55*(1-0.5584)/0.06

=55*0.4416/0.06

=$404.80

Bond value = PW of face value+ PW of coupon payment=558.39+404.80= $963.19

answer 2

Since it is a 1 year bond total payment at end of year1=face value+ coupon=100+6=$106

Price paid=$98

Hence yield will be given by r where 98=106/(1+r)

Or, 1+r=106/98

Or,r=1.0816-1

Or r=0.0816 or 8.16%