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Expert-verified Found in: Page 330 ### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# Question: A two-year bond with par value $1,000 making annual coupon payments of$100 is priced at $1,000. What is the yield to maturity of the bond? What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be: ( a ) 8%,( b ) 10%, ( c ) 12%? Answer a. 9.91% b. 10.00% c. 10.09% See the step by step solution ### Step by Step Solution ## Step 1: Given information The bond is selling at par value. Its yield to maturity equals the coupon rate, 10%. If the first-year coupon is reinvested at an interest rate of r percent, then total proceeds at the end (1 + r) + 1100]. ## Step 2: Calculation of the realized compound YTM Therefore, realized compound yield to maturity of the second year will be a function of r as given below:  r Total proceeds Realized YTM = √Proceeds / 1000 -1 8%$1208 √1208/1000 - 1 = 0.0991 = 9.91 % 10% $1210 √1210/1000 - 1 = 0.1000 = 10.00 % 12%$ 1212 √1212/1000 - 1 = 0.1009 = 10.09 %  