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Coupon Bonds: Returns and Calculations

1. For an 8-year zero-coupon bond offering an 11% yield to maturity, the total return would be 11% if held to maturity. If the time to maturity increased to 20 years, the total return would remain 11% since it depends only on yield and time held, not time to maturity. 2. For a bond paying 12% annual coupons semiannually and maturing in 3 years in a 4% market, the price today is above par and the total return is greater than the coupon rate. 3. Reasons for a bond's price declining over 3 years include changes in market interest rates, credit quality, inflation, and liquidity.

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18 views2 pages

Coupon Bonds: Returns and Calculations

1. For an 8-year zero-coupon bond offering an 11% yield to maturity, the total return would be 11% if held to maturity. If the time to maturity increased to 20 years, the total return would remain 11% since it depends only on yield and time held, not time to maturity. 2. For a bond paying 12% annual coupons semiannually and maturing in 3 years in a 4% market, the price today is above par and the total return is greater than the coupon rate. 3. Reasons for a bond's price declining over 3 years include changes in market interest rates, credit quality, inflation, and liquidity.

Uploaded by

Claudia Choi
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

TUTORIAL: COUPON BONDS

INVESTMENTS

1. Part B
a. What is the total return for an 8-year zero-coupon bond that is offering a
yield to maturity of 11% if the bond is held to maturity? Would the answer
be changed if the time to maturity is increased from 8 years to 20 years?

b. (Question 11, pg. 249) Consider a bond paying a coupon rate of 12% per annum
semiannually when the market interest rate is only 4% per half-year. The bond
has three years until maturity.
i. Find the bond’s price today and size months from now after the next
coupon is paid.
ii. What is the total rate of return on the bond?

2. Part A
a. Show the cash flows for the following four bonds, each of which has a par
value of $1,000 and pays interest semiannually.

Bond Coupon Rate(%) Number of Yearsto Maturity Price


W 7 5 $884.20
X 8 7 $948.90
Y 9 4 $967.70
Z 0 10 $456.39

b. Suppose that you purchased a debt obligation three years ago at its par
value of $100,000 and nine years remaining to maturity. The market price
of this debt obligation today is $90,000. What are some reasons why the
price of this debt obligation could have declined from time you purchased
it three years ago?

c. (Question 15, pg. 249) A 20-year maturity bond with par value $1000 makes
semiannual coupon payments at a coupon rate of 8%. Find the bond equivalent
and effective annual yield to maturity of the bond if the bond price is:
i. 950$
ii. 1000$
iii. 1050$

d. (Question 27, pg. 250) A two-year bond with par value $1000 making annual
coupon payments of 100$ is priced at $1000. What is the yield to maturity of the
bond? What will the realized compound yield to maturity be if the one-year
interest rate next year turns out to be:
i. 8%
ii. 10%
iii. 12%

e. (CFA question 8, pg. 253) Bonds of Zello Corporation with a par value of 1000$
sell for 950$, mature in five years and have a 7% annual coupon rate paid
semiannually.
i. Calculate the:
1. Current yield
2. Yield to maturity
3. Horizon yield (also called realized compound return) for an
investor with a three-year holding period and a reinvestment rate
of 6% over the period.

f. Cite one major shortcoming for each of the following fixed-income yield
measures:
a. Current yield
b. Yield to maturity
c. Horizon yield (also called realized compound return).

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