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Suppose you buy a 6% coupon bond today for $1080.The bond has 10 years to maturity.What rate of return do you expect to earn on your investment?
Two years from now,the YTM on your bond increased by 2 percent and you decide to sell the bons.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 intrest payments are reinvested at the original YTM.
Please note I got an answer from the instructor,however I do not know how this is done so please if anyone can elaborate I would appreciate thanks.
Given Answer:
P0=1080=$30(PVIFAR%20)+1000(PVIFR%20) R=2.487 YTM=4.97%
When bond is sold
$30(PVIFA3.487%16)+1000(PVIF3.487%16)=$940.99
Future value of reinvested intrest payments =$30(FVIFA2.487%4)=$124.55
Realized return=940.99-1080+124.55/1080=-1.34%
Where is this coming from ? How do I actually calculate it?
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