Consider an 7.5% coupon bond selling for $966.10 with 3 years until maturity mak
ID: 2759370 • Letter: C
Question
Consider an 7.5% coupon bond selling for $966.10 with 3 years until maturity making annual coupon payments. The interest rates in the next 3 years will be, with certainty, r1 = 7%, r2 = 8%, and r3 = 10%. Calculate the yield to maturity and realized compound yield of the bond.
Consider an 7.5% coupon bond selling for $966.10 with 3 years until maturity making annual coupon payments. The interest rates in the next 3 years will be, with certainty, r1 = 7%, r2 = 8%, and r3 = 10%. Calculate the yield to maturity and realized compound yield of the bond.
Explanation / Answer
The YTM of this bond is given by using excel formula =rate(nper,pmt,pv,fv) where nper = 3, pmt = 7.5% of 1000 = 75, pv = -966.10 and FV = 1000
Hence Yield to maturity =rate(3,75,-966.10,1000) = 8.84%
The realized compunded yield = [(1+0.07) * (1+0.08) * (1+0.10)] ^(1/3) -1 = 8.326% = 8.33%