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homework4_fall2008 - Fall 2008 Engineering 120 Industrial...

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Unformatted text preview: Fall 2008 Engineering 120 Industrial Engineering & Operations Research September 20, 2008 Page 1 of 1 Homework #4 Due: September 26, Friday at the beginning of the discussion section. 1. The YTM on a bond is the interest rate you earn on your investment if interest rates dont change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy an 8 percent annual coupon bond for $1,105. The bond has 10 years to maturity and a face value of $1000. What rate of return do you expect to earn on your investment if you are planning to hold the bond until its maturity? (Hint: Trial and error. The answer is between 6 and 7 percent.) b. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell right after you receive the second coupon. What price will your bond sell for? What is the HPY on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different? (Hint: After finding the selling price, put every cash flow youbond....
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