Question

A 30-year 7% corporate bond was issued exactly 10 years ago. You purchased this bond today, when it was trading to yield 9%. Tomorrow, the yield decreased down to 6%, only to increase to 11% after 10 years. At maturity, the bond’s realized yield must be equal to 7%.

A. True
B. False

Answer 1

B) false

Step-by-step explanation:

Realized yield is the actual return that an investment yielded during the time period that the investor held it.

Using an excel spreadsheet I determined the price of the bond (81.74), but it is not really relevant. Since I will hold the bond during 20 years until maturity, the bond will yield 9% until maturity, so that means that the realized yield of my investment was 9%, not 7%. The realized yield depends on the price at which you bought the bond and the time you hold it. If someone bought the bond in 10 years and held it to maturity, their realized gain will be 11%.

Answer 2

The answer is "B"

False

Step-by-step explanation:

At maturity the bond’s realized yield can not be equal to 7% because of the uncertain future interest rate.