Suppose that the term structure today is given as follows: Time to maturity YTM 1 1.2%...
- Suppose that the term structure today is given as follows:
|
Time to maturity |
YTM |
|
1 |
1.2% |
|
2 |
1.6% |
|
3 |
2.1% |
|
4 |
2.9% |
Suppose your investment horizon is 4 years, and you are considering buying a coupon bond with par 1000, coupon rate 3%, paying once a year.
Assume you believe in the expectations hypothesis. What is your expected realized yield?
Homework Answers
Bond price at par = 1000
coupon rate = 3% p.a , Time = 4years
Coupon amount = 1000 * 3% = 30
Present value of Bond @ YTM = PV of interest + PV of maturity value of bond
= 30 / (1+0.012) + 30 / (1+0.012)(1+0.016) + 30 / (1+0.012)(1+0.016)(1+0.021) +
30 / (1+0.012)(1+0.016)(1+0.021)(1+0.029) + 1000 / (1+0.012)(1+0.016)(1+0.021)(1+0.029)
= 1040.90
Expected realized yield = (1040.90-1000) /1000
= 0.0409 or 4.09%
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