HPY: Return you receive from holding an asset over a period of

YTM on the bond is the interest rate you earn on your investme
not change and you hold the bond till maturity. If you actually s
matures, your realized return is HPY.
Suppose you buy a 5.6% annual coupon bond for $930. The bon
maturity. What rate of return you expect to earn on your investm
Two years from now, the YTM on your bond has declined by 1
sell. What price will your bond sell for? What is the HPY on yo

T 10
P0 930
FV 1000
Coupon r 5.60%
Coupon 56
r 6.58%
PV 930.000014528849

t 8
r new 5.58%
PV 1001.43628995643 1001.44
56 56
cf 930

HPY 9.68%
pv 930.000316659649
ver a period of time.
your investment if interest rates do
you actually sell the bond before it

$930. The bond has 10 years to

n your investment?
declined by 1% and you decide to
he HPY on your investment?
 The Faulk Corp. has a 6 percent coupon bond outstanding. The
outstanding. Both bonds have 12 years to maturity, make semi a
percent. If interest rates suddenly rise by 2 percent, what is the p
bonds? What if interest rates suddenly fall by 2 percent instead
interest rate risk of lower coupon bonds ?

Lower coupon rate Higher coupon rate

Faulk Corp. Gonas Co.
fv 1000 1000
Coupon rate 6% 14%
Semi-annual coupon rate 3% 7%
T (time till maturity) 12 12
ytm (annual) 10% 10%
ytm per period 5% 5%

P0 724.0271641 1275.97283588694

ytm (new1) 12% 12%

ytm per period (new1) 6% 6%
P0(new1) 623.4892742 1125.50357527765

% Change in price -13.89% -11.79%

ytm (new2) 8% 8%
ytm per period (new2) 4% 4%
P0(new2) 847.5303686 1457.40889424191

% Change in price 17.06% 14.22%

nd outstanding. The Gonas Company has a 14 percent bond
aturity, make semi annual payments, and have a YTM of 10
percent, what is the percentage change in the price of these
by 2 percent instead ? What does this problem tell you about the

Faulk Corp. Gonas Corp.

Lower coupon Higher coupon
2% rise in Interest rate
% Change in Price -13.89% -11.79%

2% fall in interest rate

% Change in Price 17.06% 14.22%
 d
10
e
ut the