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Question: question harold is responsible for reporting on the performance of...

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Question: Harold is responsible for reporting on the performance of a portfolio which consists of investments in two bonds, A and B.  Bond A matures in two years’ time, has a coupon rate of 10% pa, a par value of $2m and a yield-to-maturity of 4.00% pa.  Bond B matures in four years’ time, has a coupon rate of 6.00% pa, a par value of $3m and a current yield-to-maturity of 5.00% pa.  Both bonds have just paid a coupon.  The current market values of Bond A and Bond B are $2,226,331 and $3,106,379, respectively. 

Harold wishes to report on the current yield-to-maturity of the portfolio. The yield-to-maturity on a bond portfolio is not calculated from the yields on the constituent bonds.  It is the internal rate of return on the portfolio cash flows.     

Show the calculation Harold is supposed to do, you do not have to compute the yield-to-maturity of the portfolio.

[7.2, Mark 3] An investor bought a 3-year zero-coupon bond in Year 0, when the 1-year zero rate was 4.1% pa, the 2-year zero rate was 5.2% pa and the 3-year zero rate was 5.7% pa. The investor sold the bond two years later. Zero-rate curves for various dates are shown in the table below.

Term (years)

Year 0

Year 1

Year 2

Year 3

1

4.1%

7.2%

10.0%

10.4%

2

5.2%

8.2%

10.1%

10.4%

3

5.7%

8.8%

10.2%

10.4%

What is the investor's holding period rate of return (pa)?

 

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