If a government bond is expected to mature in two years and has a current price of $950, what is the bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent? Suppose this bond is sold one year after purchase for a price of $970. What would this investor's holding period

Question

If a government bond is expected to mature in two years and has a current price of $950, what is the bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent? Suppose this bond is sold one year after purchase for a price of $970. What would this investor's holding period yield be?

Accepted Answer

The relevant formula is:

[latex]\$ 950=\frac{\$ 100}{(1+Y T M)^{1}}+\frac{\$ 100}{(1+Y T M)^{2}}+\frac{\$ 1000}{(1+Y T M)^{2}}[/latex]

Using a financial calculator we get:

YTM = 12.99%

If the bond is sold after one year, the formula entries change to:

[latex]\$ 950=\frac{\$ 100}{(1+ HPY )^{1}}+\frac{\$ 970}{(1+ HPY )^{1}}[/latex]

and the HPY is:

HPY = 12.63%

Question 10.9: If a government bond is expected to mature in two years and ...

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