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Tutorial+15+solution - Tutorial 15 Solution 1(a Bond Value...

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Tutorial 15 Solution 1. (a) Bond Value = 1000 / (1+YTM) 3 $816.30 = 1000 / (1+i) 3 i = 7% (trial and error) (b) $949.37 = 70/(1+i) + 70/(1+i) 2 + 1070/(1+i) 3 i = 9% 2. Bond Value = 100/(1.12) + 100/(1.12) 2 + 100/(1.12) 3 + 1100/(1.12) 4 = $939.25 Bond Value = 100/(1.08) + 100/(1.08) 2 + 100/(1.08) 3 + 1100/(1.08) 4 = $1066.24 3. The use of the YTM is predicated on several assumptions. 1. The most critical assumption is that interest income generated by a fixed-income security is reinvested (compounded) at the YTM. If this is assumption is true, then the YTM correctly states that the return over the bond’s life that the buy-and-hold investor will realize on his or her bond investment. If this assumption is false, then the realized return will differ, perhaps significantly from the YTM. The presumption that all interest income can be reinvested at the YTM implies a flat, unchanged yield curve. Once the
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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Tutorial+15+solution - Tutorial 15 Solution 1(a Bond Value...

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