You buy an 8% coupon, 20-year-maturity bond when its yield to maturity is 9%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 10%. What is your return over the 6 months?


To calculate your return over the six months, we need to determine the bond's price when you purchased it and the bond's price six months later. Here's the step-by-step breakdown:

### Step 1: Bond Price at Purchase (Yield to Maturity = 9%)

The bond price can be calculated using the present value of the bond's coupon payments and the present value of its face value. Since the bond makes semiannual coupon payments, we need to adjust the coupon rate, yield to maturity, and number of periods accordingly:

- **Coupon payment**: 8% annual coupon rate = $ 8\% \times 1000 = 80 $ annually, or $ 80 / 2 = 40 $ semiannually.
- **Semiannual yield to maturity**: $ 9\% / 2 = 4.5\% $ per period.
- **Number of periods**: $ 20 \times 2 = 40 $ semiannual periods.

The bond price at purchase is:

\[
P_0 = \sum_{t=1}^{40} \frac{40}{(1 + 0.045)^t} + \frac{1000}{(1 + 0.045)^{40}}
\]

### Step 2: Bond Price Six Months Later (Yield to Maturity = 10%)

Now, after six months, there are 39 remaining periods, and the new yield to maturity is 10%, or 5% per semiannual period:

- **Coupon payment**: Still $ 40 $ per semiannual period.
- **Semiannual yield to maturity**: $ 10\% / 2 = 5\% $ per period.
- **Number of periods**: Now 39 periods remaining.

The bond price after six months is:

\[
P_1 = \sum_{t=1}^{39} \frac{40}{(1 + 0.05)^t} + \frac{1000}{(1 + 0.05)^{39}}
\]

### Step 3: Total Return Over 6 Months

Your return over the six-month period includes the semiannual coupon payment received and the change in the bond's price:

\[
\text{Total return} = \frac{P_1 - P_0 + \text{Coupon Payment}}{P_0}
\]

We can now calculate both bond prices and find the return. Let me compute that.It seems like I can’t do more advanced data analysis right now. Please try again later. If you'd like, you can still proceed manually with the formulas I provided earlier, or you can ask me to try again later.

Would you like help with any other part of the problem or perhaps any related questions?

Here are some follow-up questions you may find useful:

1. How does the bond price react to changes in yield to maturity?
2. What is the difference between coupon rate and yield to maturity?
3. How do bond prices move when interest rates increase or decrease?
4. What is the duration of a bond, and how does it affect its price sensitivity?
5. What are the risks associated with holding bonds over the long term?

**Tip**: Bond prices and yields move in opposite directions. When interest rates rise, bond prices fall, and vice versa.

You buy an 8% coupon, 20-year-maturity bond when its yield to maturity is 9%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 10%. What is your return over the 6 months?

Learn how to calculate the return on an 8% coupon, 20-year bond purchased with a 9% yield to maturity, as its yield changes to 10% after six months. This example covers bond pricing concepts, time value of money, and return calculations, suitable for finance students.

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