Question

A two-year bond with par value $1,000 making annual coupon payments of $108 is priced at $1,000. a. What is the yield to maturity of the bond? (Round your answer to 1 decimal place.) Yield to maturity 10.81% b. What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8.8%, (b) 10.8%, (c) 12.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Realized YTM Interest Rate 8.8% 10.8 % 12.8 % 10.80 %

Answer 1

Given,

Bond's par value = $ 1000

Bond's selling price = $ 1000

Coupon payments = $ 108

Solution :-

a) In this Case cf bord Value Par Is equal to selling Pnce of the bond. So, whtn the par Value of a bond equals its seluing p2nice ids yielol to matunity equals to Coupon ate Nows Coupon Pau ment Par Value loupon rate $108 $1000 10.8-1 O.108 Thus Vield do matunity of the bond is 10.81.

b) 1P the rst year de invested is Coupon ate of at the then, tortal at ethe end ot 2nd year procecds eill be Total Pooleeds Par Value t Coupon Payment Coupon अज्यि So Tatal Proceeds ohen, &.8 or 0.088) 108(1+0.08e+/1000 + 08 108(1.088) + $1108 117.Soy t $1108 R85.S04 Total Procecds when, ( l0.8% 0r 0.10 E$108 0+0.108) +lo00 +$1l08 $l08(1. 108) + $108 $119.664 t 1108 $ ।२२१.669 AV

Total Proleeds when(r 13.8 or 0.128) l lo8 (+0.128) +$1000+$l08) - l08 (. 128)। । ।0४ +$1108 - $R39.824 131.274 11 Nows Realized yTM Total Proteeds Totel Proceeds $1000 1235. Soy 1000 8.8% 1235. So4 1. 1070-1 0. l070 0 10.70% 10.8% 123.664 1237.664 1000 - 1 1. 1080-1 O.1080 or 10.80% 13.87. 1229. 824 |।२२१.४२५ lo00 1. 1090-1- O. l090 0 10.90%