Bond Interview Question?
Saw this question and I had no idea how to answer it. A bond with 6% coupon and 30yr term is bought with 6% YTM. After a year, one coupon payment is collected and the bond is sold with 11% YTM. Without using a calculator, what is the one year IRR of this investment?
The answer is supposed to be -40%, but no idea have to get there. Thoughts?
Cash distribution gets you 6% yield. Capital depreciation nets you 6/11-1.
Add those 2 up to get -40%
can u just go into a little more detail please
Bond's at par (coupon = YTM) throughout Y1. At sale, it's at a discount (coupon YTM). Thus, 6% is par value and 11% is discount value. 6%/11%-1 is the relative loss (-45%). The loss is softened by the 6% yield. End result is -39%.
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