For the bond in problem solved below, 1- calculate the realized compound yield (RCY) with a re-investment rate of 9%. 2- What problem does the RCY correct and why is this important? 3- If the investor believes interest rates are going to increase, is this a good bond choice? Think Price/Yield curve.

Solved Bond Problem referenced above:

A bond is selling for $919. The coupon rate is 7.8%. It has 18-years till maturity, with semi-annual compounding. What is the yield-to-maturity (YTM)?

• Face value of Bond = $1,000
• As there is semiannual Compounding
• Semiannual Coupon Payment = $1,000 * 7.8% * 6 / 12 = $39
• As semiannual ( n ) = 18 * 2 = 36
• Bond Price ( B ) = $919
• Now Yield to maturity ( YTM ) =

• YTM = (39 + ((1000-919)/36))/((1000+919)/2)
• YTM = 39+2.25/959.50
• YTM = 0.043 = 4.3%
• Annual Yield to Maturity = 4.3% * 2 = 8.7% rounded