Question
6. A 10-year bond has an 8% coupon rate and a face value of $1000. (assuming annual interest payments). 3) The investor A, who bought
6. A 10-year bond has an 8% coupon rate and a face value of $1000. (assuming annual interest payments).
3) The investor A, who bought the bond at t=0 when the current YTM on the bond was 8%, was forced to sell the bond at t=2 immediately after receiving the 2nd coupon payment of $80, when the YTM has increased to 20%.
(1) What is the price of the bond at t=2. (Note that the market interest rate(=YTM) is 20% at t=2)
(2) What is the actual rate of return for the investor A for the period of 0 to 2?
(3) What is the rate of return for the investor B who bought the bond from investor A at t=2 and hold it to maturity? (Show cashflow and write formula and guess the answer. What is the intuitions here?)
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