Question
a. Suppose you were considering buying a $1000 coupon bond with a 8% (annual) coupon rate back in January of 2001 that would mature in
a. Suppose you were considering buying a $1000 coupon bond with a 8% (annual) coupon rate back in January of 2001 that would mature in January of 2011. In addition, suppose that you were expecting the interest rate on Treasuries to stay at 5.16% per annum (which it was on January 1st, 2001) for the entire 10 years. What is the expected present discounted value of the coupon bond on this basis?
b. Calculate what the average (annualized ) monthly interest rate was over this period, 1/2001 - 1/2011. Using this as the basis to discount the coupon bond in part b, what would be the expected present discounted value of the coupon bond back in January of 2001?
c. Looking back at the series of interest rates between 2001 - 2011, what was the actual present discounted value of the 10-year coupon bond? [Hint: Note that in answering this question, you will need to use the series of interest rates in the data to determine the actual ex-post PDV.] Was the ex-post PDV higher or lower than your answer to part (a)?
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