(1): Here as the bond is trading at par its YTM = coupon rate. Thus YTM = 6%.
You can also compute the YTM using the ‘rate’ function in excel. Here nper = 5*2 = 10, pmt = 6%/2*1000 = 30, pv = -1000 and fv = 1000. Thus YTM = [rate(10,30,-1000, 1000)]*2 = 6%
(2): Here after 1 year means the period after 2 payouts i.e. 2 periods of 6 months each. So we will consider semi-annual periods 3 to 10 i.e. years 2 to 5. Also the rate will now be 7%/2 = 3.5%. Thus new price of the bond = present value of cash flows for the next 8 periods (i.e. 4 years) discounted at 3.5% (i.e. 7%/2). Thus new price = $901.43
Semi-annual period | Cash flow | 1+r | PV |
3 | 30 | 1.035 | 27.06 |
4 | 30 | 26.14 | |
5 | 30 | 25.26 | |
6 | 30 | 24.41 | |
7 | 30 | 23.58 | |
8 | 30 | 22.78 | |
9 | 30 | 22.01 | |
10 | 1030 | 730.19 | |
Total | 901.43 |
(3): Holding period return = [Income + (ending value - initial value)]/initial value
Income = 30+30 = 60. Ending value = 901.43 and initial value = 1000
Thus return = [60+(901.43-1000)]/1000
= -3.86%
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