Question

You buy an 9-year $1,000 par value bond today that has a 6.50% yield and a 6.50% annual payment coupon. In 1 year promised yields have risen to 7.50%. What would be the EAR be? And how do you calculate it? How does it compare to Holding period of 1 year?

Answer 1

Bond Par Value = $1,000

Coupon Rate = 6.50%

Time to Maturity = 9 years

Bond was purchased at par value, as at that time YTM = Coupon Rate

After 1 year,

YTM = 7.50%

Calculating Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 5, PMT = 65, I = 0.075]

PV = $959.54

EAR = (959.54 - 1,000 + 65)/1,000

EAR = 2.45%