Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer maturity bond? #3: Bond J is a 4 percent coupon bond; Bond K is a 12 percent coupon bond. Both bonds have nine years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by 2 percent, what is the percentage change of these bonds? What if rates suddenly fall by 2% instead? What does this problem tell you about the interest rate risk of lower-coupon bonds? #4: The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realised return is known as the holding period yield (HPY). a. Suppose that today you buy a 7 percent annual coupon bond for $1,060. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? b. Two years from now, the YTM on your bond has declined by 1 percent, and you decided to sell. 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?
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- Spring '11
- Finance, Bond Dave