Question

6. Suppose that you purchase a 2 year coupon bond at the time it is issued for $1100. The face value of the bond is $1000, with annual coupon payments of $80. a. What is the bond's "coupon rate"? b. What is the bond's "current yield"? C. What is the bond's (nominal) "yield to maturity"? d. If you hold the bond for 1 year and sell it for $1035 (after collecting the first coupon payment), what is your "holding period rate of return"? 7. Describe the difference between a bond's "yield to maturity" and its "holding period rate of return". Under what conditions would they be the same for a coupon bond? 8. Suppose that you pay $10,000 for a newly issued 3 year coupon bond with a 7% coupon rate and a $10,000 face value. Coupon payments are made once each year, at the end of the year. a. What is the (nominal) yield to maturity offered by the bond? b. At the end of 1 year (after collecting the first coupon payment), you decide to sell the bond. If the nominal interest rate is 7% at the end of one year and expected to remain at 7% for the foreseeable future, what price will the bond sell for? What will be your holding period rate of return? C. If, instead, the nominal interest rate is 10% at the end of one year, what price will the bond sell for? What will be your holding period rate of return in that case? d. In general, how will an increase in interest rates while you are holding a bond affect your holding period rate of return? Explain. 9. Suppose you take out a $20,000 fixed payment loan to purchase a car. The loan is to be repaid in monthly installments over a term of 5 years. If your loan is obtained at an annual nominal interest rate of 18%, and interest is compounded monthly, how much will your monthly payments be?

Answer 1

As per rules I am answering the first 4 subparts of the question

1: Coupon rate = Copoun amount/ face value = 80/1000 = 8%

2: Current yield = Annual coupon/Price

=80/1100 = 7.27%

3:  Using financial calculator
Input: FV= 1000, N=2, PMT=80, PV=-1100

Solve for I/Y as 2.79

YTM= 2.79%

4: HPR = (Selling price+ Coupon-Purchase price)/ Price

= (1035+80-1100)/1100

= 1.36%