The bond has a face value of $1000 and is bought at par with a coupon...
The bond has a face value of $1000 and is bought at par with a coupon rate of 5%. After one year, the market yield on the bond changes to 9 %.
|
Yrs to maturity |
Initial curr yield |
Initial P(t) |
P(t+1) |
Capital Gain |
Rate of Return |
|
1 |
0.05 |
1000 |
1000.000 |
0.000 |
0.05 |
|
2 |
0.05 |
1000 |
|||
|
3 |
0.05 |
1000 |
|||
|
5 |
0.05 |
1000 |
|||
|
7 |
0.05 |
1000 |
The bond has a face value of $1000 and is bought at par with a coupon rate of 9%. After one year, the market yield on the bond changes to 5%.
|
Yrs to maturity |
Initial curr yield |
Initial P(t) |
P(t+1) |
Capital |
Rate Of Return |
|
1 |
0.09 |
1000 |
1000.000 |
||
|
2 |
0.09 |
1000 |
|||
|
3 |
0.09 |
1000 |
|||
|
5 |
0.09 |
1000 |
|||
|
7 |
0.09 |
1000 |
Homework Answers
Solution:
Here we need to find out what will be the Price of bond after (1+t) years and capital gain.
For both tables we are considering YTM as 9% and 5% respectively. Which is rate of return for all the required year. The value of bond price will vary with respect to the time of maturity.
For Bond at $1,000 with 5% coupon rate having yield after 1 year at 9%
| Yrs to maturity | Initial curr yield | Initial P(t) | P(t+1) | Capital Gain | Rate of Return |
| 1 | 5.00% | 1,000.00 | 1,000.00 | - | 5.00% |
| 2 | 5.00% | 1,000.00 | 963.30 | (36.70) | 9.00% |
| 3 | 5.00% | 1,000.00 | 929.64 | (70.36) | 9.00% |
| 5 | 5.00% | 1,000.00 | 870.41 | (129.59) | 9.00% |
| 7 | 5.00% | 1,000.00 | 820.56 | (179.44) | 9.00% |
For Bond at $1,000 with 9% coupon rate having yield after 1 year at 5%
| Yrs to maturity | Initial curr yield | Initial P(t) | P(t+1) | Capital Gain | Rate of Return |
| 1 | 9.00% | 1,000.00 | 1,000.00 | - | 9.00% |
| 2 | 9.00% | 1,000.00 | 1,038.10 | 38.10 | 5.00% |
| 3 | 9.00% | 1,000.00 | 1,074.38 | 74.38 | 5.00% |
| 5 | 9.00% | 1,000.00 | 1,141.84 | 141.84 | 5.00% |
| 7 | 9.00% | 1,000.00 | 1,203.03 | 203.03 | 5.00% |
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