Jhansi Jhansi (9 Points)
27 December 2022A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850 and a yield to maturity of 12%. Intuitively and without the use calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be ?
Can anyone tell me how to calcualte the realised yield ?
Yasaswi Gomes new
(Finance )
(4492 Points)
Replied 27 December 2022
Use YTM on this to get the total yeild on this bond until maturity. If it is reinvested? It's a CFA function and my curriculum doesn't cover this. I'll find some other resources.
Yasaswi Gomes new
(Finance )
(4492 Points)
Replied 27 December 2022
Here is your answer attached
Jhansi Jhansi
(9 Points)
Replied 27 December 2022
Hi Yasawi,
Yes it is reinvested @ 10%.
Thank you so much for your response, I will try to solve using your attachment. but what makes it strange for me is the question says that without using calculations find it intuitively, I was wondering how is it done... he he...
Many Thanks,
Jhansi
Jhansi Jhansi
(9 Points)
Replied 27 December 2022
I got the answer:
The realized yield would have to be between the reinvested rate of 10% and the yield to maturity of 12%.
While no calculation is necessary to answer this question, the realized yield can be calculated as follows.
The value of the reinvested coupons at the maturity date is: N = 20; I/Y = 10; PMT = 100; PV = 0; CPT FV = 5,727.50.
Adding the principal repayment, total cash at maturity is $6,727.50.
Realized yield: N = 20; PMT = 0; PV = -850; FV = 6727.5; CPT I/Y = 10.90.
Yasaswi Gomes new
(Finance )
(4492 Points)
Replied 27 December 2022
Ok Jansi. That's great. Do you have securities valuations module
Live class on PF & ESI Enrollment & Returns Filing(with recording)
CAclubindia
