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a) You are presented with bond A that has the following characteristics: Coupon is paid semi-annually and your investment horizon is 1.5 years. i) If

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a) You are presented with bond A that has the following characteristics: Coupon is paid semi-annually and your investment horizon is 1.5 years. i) If the yield after 6 months falls to 5.5% and then to 4.5% from the beginning of year 2 , what would be your coupon income, reinvestment income, price appreciation/depreciation, and holding period return from this bond? (9 marks) ii) Is bond's yield to maturity in this example a good approximation of bond's return over the holding period? Explain. (5 marks) iii) What is the current yield of this bond and how it compares to the bond's yield to maturity? Explain. (5 marks) b) Assume a bond that has 22 years to maturity, 6\% semi-annual coupon and a yield of 4%. Assuming it is held until maturity, what would be the proportion of reinvestment income in total income for this bond? Answer, explaining the relationship between the proportion of reinvestment income and time to maturity of a bond. (6 marks)

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