Question
An investor purchases a four-year, 8% semi-annual coupon payment bond at a price equal to par value. After the bond is purchased and before the
An investor purchases a four-year, 8% semi-annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 10%. The investor sells the bond after two years. Assume that interest rates remain unchanged at 10% over the two-year holding period.
1) calculate the total coupon reinvestment returns (in dollars) at the end of the holding period.
2) Calculate the capital gain (loss) from the sale of the bond at the end of the holding period.
3) Calculate the holding period return assuming all coupons are reinvested.
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