Question

A two-year bond with face value $1,000 and annual coupon payment of $100 is priced at $1,000. If the one-year interest rate next year turns out to be 13%. What will be the realized compound yield?

9.91%

10.09%

10.00%

10.14%

Answer 1

first year coupon is reinvested at rate of r%, total proceeds at the end of year two will be=100*(1+13%)+(1000+100)=1213

What will be the realized compound yield

=((proceeds/1000)^(1/2))-1

=((1213/1000)^(1/2))-1

=10.14%

the above is answer..