Question
1. Suppose you buy a 20-year, 7.5% (semiannual payment) coupon bond for $1,099 when its yield to maturity is 6.60% and plan to hold it
1. Suppose you buy a 20-year, 7.5% (semiannual payment) coupon bond for $1,099 when its yield to maturity is 6.60% and plan to hold it for 15 years. You forecast that the bond's yield to maturity will be 8% when it is sold and that the reinvestment rate on the coupons will be 6.40%.
1.1) What is the expected bond's sales price at the end of the investment horizon?
a. $1,035.61
b. $1,042.93
c. $979.72
d. $959.24
e. $923.57
1.2) What is the realized rate of return at the end of your investment horizon?
a. 7.50%
b. 7.12%
c. 5.84%
d. 6.39%
e. 6.65%
2. Consider the following $1,000 par value zero coupon bonds:
Bond Maturity (years) YTM (%)
A 1 4%
B 2 4.5%
C 3 5%
D 4 6.5%
2.1) Assuming that the expectations hypothesis is valid, what is the expected price of Bond C at the end of the first year?
a. 845.61
b. $925.45
c. $1,034. 56
d. $1,015.69
e. $898.39
2.2) Assuming that the liquidity preference theory is valid and the liquidity premium is 1.2%, what is the expected price of Bond D at the end of the second year?
a. $852.73
b. $841.52
c. 836. 74
d. $867. 95
e. $899.41
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