Let’s say you purchase an AAA-rated, 10% coupon, 20-year maturity, $1000 par value corporate bond today for $1085. You hold it for 5 years, re-invest the semi-annual coupons at 5% per year and sell the bond off when investors are offering a yield of 13% on it. What yield to maturity were you expecting to earn when you first purchased the bond? What was your holding period yield? Please explain the difference (if any). Please do the required numerical calculations to substantiate your answer.
ANSWER TO PROBLEM :
(A). Yield to maturity expected when you first purchased the bond =
(B). Holding period yield = =
