One year ago, you purchased a $1,000 face value bond at a yield to maturity of 9.45%. The bond has a 9% coupon and pays interest semiannually. When you purchased the bond, it had 12 years left until maturity. You are selling the bond today when the yield to maturity is 8.20%. What is your realized yield on this bond?

Question

Quizplus · Accepted Answer

The realized yield can be calculated by finding the internal rate of return (IRR) on the cash flows associated with the bond. When you purchased the bond, it was priced to yield 9.45% given its 9% coupon rate and 12 years to maturity. Selling the bond when the yield to maturity has decreased to 8.20% means you would sell it at a premium because bond prices move inversely to yields. The cash flows would include the semiannual coupon payments received, and the sale price of the bond, which would be higher than the purchase price due to the decreased yield. The realized yield is the rate that equates these cash flows to the purchase price of the bond. Without doing the exact math here, the key is understanding that the realized yield would be higher than both the coupon rate and the initial yield to maturity due to the capital gain on the bond. Among the provided options, 18.11% is the highest yield, indicating the significant positive impact of selling the bond at a premium. This scenario reflects a simplified explanation; the exact calculation would require detailed cash flow analysis.

One Year Ago, You Purchased a $1,000 Face Value Bond