Question
5) A 4.25% coupon bond with 15 years left to maturity is priced to offer a 5.5% yield to maturity. You believe that in one
5) A 4.25% coupon bond with 15 years left to maturity is priced to offer a 5.5% yield to maturity. You believe that in one year, the yield to maturity will be
7.125%. If this occurs, then what would be the return of the bond in dollars (i.e., if you buy it now and sell it in one year, then how much money would you get)?
a. Notes:
i.you are not being asked for a return percentage; rather you need to calculate the amount of money you will receive in dollars;
ii.assume interest payments are semiannual;
iii.use the following definition for return: the return is equal to the change in value plus any interest, i.e. Return of bond in dollars = change in value plus interest earned in a year. [Please set your calculator to display 4 decimal places.]
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