Question
A five-year government bond makes annual coupon payments of 4% and offers an annual yield of 8%. Suppose that, one year later, the bond still
A five-year government bond makes annual coupon payments of 4% and offers an annual yield of 8%. Suppose that, one year later, the bond still yield 8%. What return has the bondholder earned over the first 12-month period? Now suppose that the bond yield 6% at the end of the year. What return would he have earned in this second case? The face value of the bond is 1,000 and we assume that he holds the bond only for 12 months.
A. Approximately 8% and 6%, respectively
B. Approximately 8% and 16%, respectively
C. Approximately 18% and 6%, respectively
D. Approximately 18% and 16%, respectively
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