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Assume we buy a 5 year, 6% coupon Treasury bond at 100 and plan to hold it to maturity. We will reinvest coupons in securities
- Assume we buy a 5 year, 6% coupon Treasury bond at 100 and plan to hold it to maturity. We will reinvest coupons in securities maturing at the same time as this security. If treasury rates increase by 100 basis points in all maturities immediately after we purchase the security, which of the following statements is true?
- Our return will be less than the promised yield to maturity because of capital losses.
- Our return will be greater than the promised yield to maturity because the coupon income will increase.
- Our return will equal the promised yield to maturity because we will hold the bond to maturity.
- Our return will be greater than the promised yield to maturity because reinvestment income will be greater than assume
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