Reference no: EM132652417

Q1. Consider a coupon bond with a face value of $100, a coupon rate of 20%, a time-to-maturity of three years and a yield-to-maturity of 4% (implying a price of $144.40).

a. What would be the holding period return on buying the bond today and selling it in one year's time if interest rates in one year's time are such that the bond's yield-to-maturity is still 4%?

b. What would be the holding period return on buying the bond today and selling it in one year's time if interest rates in one year's time are such that the bond's yield-to-maturity is 5%?

c. What would be the holding period return on buying the bond today and selling it in one year's time if interest rates in one year's time a re such that the bond's yield-to-maturity is 3%?

d. Can you think of any reason why the change in holding period return is not symmetric even though the change in yield-to-maturity is, i.e. it is changing by one percent in both question b and c compared to question a (although in different directions)?

Q2. A 2-year bond with par value of $1000 making annual coupon payments of $50 is priced at $1000. What is the yield to maturity of the bond (without any calculation, are you able to answer this question?)? What will be the realized compound yield to maturity if the 1-year interest rate next year turns out to be: a) 3%, b) 5%, c) 8%?