FINA 475 Lecture Notes - Lecture 3: Total Return, Basis Point
25 Sep 2017
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Weighted average yield = w1y1 + w2y2 + w3y3 etc. Weighted average yield = . 161*. 09 + . 349*. 105 + . 49*. 085 = 0. 0928. Sources of dollar return: coupon payments, reinvestment of coupons (interest on interest, maturity or sales price. 20 year 8% coupon, price = . 40, ytm = 10%, reinvestment rate = 6%, sell at 7% after 3 years, semiannual. 1: 17 year bond, 8% coupon, 7% ytm, pv = 40/1. 035^t + 1000/(1. 035)^34 = 1098. 50, total dollars = 258. 74+1098. 50 = 1357. 24, total return = (1357. 24/828. 40)^(1/6)-1=0. 0858. 13 year 9% coupon, price = , first 4 coupons reinvest at 8%, last 8 invest at 10%, sell at ytm of 10. 6% on a 7 year bond at end of 6 years. Coupon interest on interest = 45*((1. 04)^4-1)/. 04 = 191. 0909. Pv on 7 year bond, semiannual, fv = 1000, coupon = 45, i =5. 3% Increased required yield in market decreases present value of expected cash flows and decreases market price of bond.
