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The YTM on a bond is the interest rate you earn on your investment if interest rates

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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 realized return is known as the holding period yield (HPY).

a. Suppose that today you buy a bond with an annual coupon rate of 7 percent for $1,050. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000.

b. Two years from now, the YTM on your bond has declined by 1 percent, and you decide 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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Labindao Antoque
I graduated in 2018 with a Bachelor of Science degree in Psychology from Dalubhasaan ng Lungsod ng San Pablo. I tutored students in classes and out of classes. I use a variety of strategies to tutor students that include: lecture, discussions about the subject matter, problem solving examples using the principles of the subject matter being discussed in class , homework assignments that are directed towards reinforcing what we learn in class , and detailed practice problems help students to master a concept. I also do thorough research on Internet resources or textbooks so that I know what students need to learn in order to master what is being taught in class .
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Fundamentals Of Corporate Finance

Fundamentals Of Corporate Finance

ISBN: 9781265553609

13th Edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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