Bond pricing - decline in yield to maturity
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Question 5 (Bonds)
You purchased a 10-year bond on the basis of a current yield of 6.5%. The face value of the bond at maturity is $1,000 and the coupon rate is 6% (APR) payable semi-annually.
(a) What are the purchase price of the bond and its YTM?
(b) The day after you bought the bond, interest rates on similar bonds decreased by one full percentage. You were planning to sell the bond after 3 years. If interest rates don't change between now and then, what price would you get for your bond in 3 years?
(c) Instead, you sold your bond a year after purchasing it. Calculate the rate of return on your investment at yield to maturity of 5.5% and any interest income received on the bond is reinvested at 1% APR compounded semi-annually?
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Solution Summary
This is a good learning exercise to understand bond pricing concepts.
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a)
Yield 6.50%
Face Value $1,000
Coupon Rate 6% Semi-Annual
Term 10 years
Period Cash Flows
1 $30
2 $30
3 $30
4 $30
5 $30
6 $30
7 $30
8 $30
9 $30
10 $30
11 $30
12 $30
13 $30
14 $30 ...
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