Question

30. You've just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond? Suppose you buy a 6 percent coupon bond today for $1,080. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? What is the realized yield on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different? Assume interest payments are reinvested at the original YTM.

Answer 1

30)
A bond could have any maturity date as bonds sells at par can have any length of maturity ,it is undeterminate

Par Value	$1,000.00
Coupon Rate	6.00%
Coupon Payment	$60.00
Current price	$1,080.00
Maturity	10
YTM = Rate(10,60,-1080,1000)	4.97%
Par Value	$1,000.00
Coupon Rate	6.00%
Coupon Payment	$60.00
Maturity	8
YTM = 2% + 4.97%	6.97%
Current Price = PV(6.97%,8,-60,-1000)	$942.26
Realized Return =	-0.71%
Year	Cash Flow
0	-$1,080.00
1	$62.98	$60 x (1+4.97%)^1
2	$1,002.26	60+942.26
IRR	-0.71%
The realized yied is lesser than the expected YTM when the bond was bought because interest rates increased by 2 percent; bond prices fall when yields increase.