Realized yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond today, what would be his realized yield? (Round to the nearest percent.)

Question

Quizplus · Accepted Answer

To calculate realized yield, we need to use the formula:

Realized Yield = [(Face Value / Purchase Price) ^ (1/n)] - 1

where n = number of years held

First, we need to find the face value of the bond. The bond pays a coupon of 10% semiannually, so the annual coupon rate is 10% * 2 = 20%.

The face value of the bond can be found using the following formula:

Face Value = (Coupon Payment / Yield) * [1 - (1 / (1 + Yield)^n)]

where Coupon Payment = (Face Value * Annual Coupon Rate) / 2

Solving for Face Value, we get:

Face Value = ($100 / 0.05) * [1 - (1 / 1.05^30)] = $2,538.28

Next, we can use the realized yield formula:

Realized Yield = [(Face Value / Purchase Price) ^ (1/n)] - 1

Realized Yield = [(2538.28 / 980) ^ (1/10)] - 1 = 0.1088 = 10.88%

Rounding to the nearest percent, we get a realized yield of 11%. Therefore, the answer is C.

Realized Yield: Jorge Cabrera Paid $980 for a 15-Year Bond