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A bond has three years to maturity, $1,000 par value, 5%percent coupon rate, 8% yield to maturity, and makes semiannual payments. Now assume you plan
A bond has three years to maturity, $1,000 par value, 5%percent coupon rate, 8% yield to maturity, and makes semiannual payments. Now assume you plan to buy this bond and hold it only for two years, at which time you will sell it in the market. You believe the bond's yield to maturity will be 9% when you sell the bond in two years. Assuming you are a rational investor, calculate the value of the bond: At the end of its second year. Today. Solution Consider a bond with a $1,000 face value, five years to maturity, and $80 annual coupon interest payments. The bond currently sells at $1,000. The bond's yield is expected to decline to 7% at the end of three years. Interest income is assumed to be invested at 7.5%. Calculate the bond's price change over the 3-year holding period. Calculate the total value of the coupon interest payments plus the interest on the coupon payments at the end of the 3-year holding period. Calculate the bond's realized 3-year holding period return. Solution
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