Suppose you buy a 7.5 percent coupon bond today for $1,080. The bond has 15 years to

Question:

Suppose you buy a 7.5 percent bond today for $1,080. The bond has 15 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? What is the realized yield on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different? Assume interest payments are reinvested at the original YTM.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...