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An investor buys a bond with the following characteristics: Maturity - 10 years Coupon - 4.5%, paid once per year Nominal Value - 100 The
An investor buys a bond with the following characteristics:
- Maturity - 10 years
- Coupon - 4.5%, paid once per year
- Nominal Value - 100
The yield to maturity at the time of purchase is 8.50%. The investor sells the bond immediately after the sixth coupon payment, when the yield to maturity rises to 9.50%.
- a.What is the investors realised annual rate of return after the sale of the bond, assuming that the investor can reinvest received coupons at the yield to maturity?
- b.What is the Macaulay duration of the above bond, at the original time of purchase?
- c.Use the modified Macaulay duration to calculate what the price of the above bond would have been immediately after purchase, if the yield to maturity had dropped to 6.5%.
- d.An accurate answer for part (c) is 85.32. Explain why your answer to part (c) differs from this. What are the implications of this effect for bond investors?
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