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Question: A Bond With Face Value $10,000 Pays I(2) =9%. An Investor Buys It For $10,500 And Sells It 4 Years Later For $10,200.

Question:A bond with face value $10,000 pays i(2) =9%. An investor buys it for $10,500 and sells it 4 years later for $10,200. Calculate the yield rate, i(2), earned by the investor over this period using the method of averages(answer is 7.97%)

Answer:

YTM = [  [  Interest + (Selling price – Purchase Price )/n ] / (Selling price + Purchase Price) / 2  ] * 2

YTM = [ 10000*9%*50% + (10200-10500)4*2 ] / ( 10200+10500) / 2

YTM = 0.0797

YTM is 7.97%

 

 

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