Question: Let's say you purchase an AAA - rated, 9 % coupon, 2 0 - year maturity, $ 1 0 0 0 par value corporate bond

Let's say you purchase an AAA

-

rated,

9 %

coupon,

20 -

year maturity, $

1000

par value corporate bond today for $

1075 .

You hold it for

5

years, re

-

invest the semi

-

annual coupons at

5 %

per year and sell the bond off when investors are offering a yield of

12 %

on it

.

What yield to maturity were you expecting to earn when you first purchased the bond? What was your holding period yield? Please explain the difference

(

if any

) .

Please do the required numerical calculations to substantiate your answer.

ANSWER TO PROBLEM

6

(

) .

Yield to maturity expected when you first purchased the bond

=

(

) .

Holding period yield

=

Let's say you purchase an AAA-rated, 9% coupon, 20-year maturity, $1000

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