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You currently own a $1,000 10-year corporate bond with a coupon rate of 7.2%. The bond was issued 3 years ago and you bought it two years ago. Currently, its quoted price is 105.8, but when you purchase it the price was 106.6.
a) What is the bond’s effective annual yield to maturity?
b) What is the effective annual rate of return (holding period return) on your bond investment so far?
c) If the bond price suddenly increases by 5%, what will be the bond’s new effective annual yield to maturity? Explain the direction of the change intuitively!
d) If the bond price suddenly increases by 5%, what will be your new effective annual rate of return (holding period return) on your bond investment so far? Explain the direction of the change intuitively.
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