Question
A 5-year coupon bond is priced at $100. It has a face and redemption value of $100 and a coupon rate of 10% per annum
A 5-year coupon bond is priced at $100. It has a face and redemption value of $100 and a coupon rate of 10% per annum payable semiannually. a. Use The Salesmans Rule to find the per annum yield to maturity. b. If the coupons can be reinvested at 8% per annum compounded semiannually, find the total account balance at the end of 5 years (i.e. the terminal wealth of the bond at the end of term) and find the interest on interest at the end of the 5 years.
A 5-year Zero Coupon Bond has a yield to maturity of 9% per annum compounded semiannually. c. If the same $100 was used to buy the Zero Coupon Bond then what would the account balance be at the end of 5 years? Which bond should Betty and Bob buy (and why)? d. What is the per annum yield to maturity, compounded semiannually, for the Zero Coupon Bond to result in a break-even situation, i.e. no advantage to possession of either bond? This yield is called the total dollar rate of return.
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