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Realised Yield of a Bond

Others 775 views 5 replies

A 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 ?

 

Replies (5)

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. 

Here is your answer attached 

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

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.

Ok Jansi. That's great. Do you have securities valuations module


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