Question
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of credit risk and mature
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of credit risk and mature in 10 years. All bonds have face values of $1,000. The first is a zero-coupon. The second has an 8% coupon rate and pays annual coupons. The third has a 10% coupon rate and also pays annual coupons.
a) If all three bonds are now priced with a yield-to-maturity of 8%, what are their prices?
b) If you expect their yields to be 8% at the beginning of next year, what will their prices be then?
c) What is the rate of return on each bond during the one-year holding period after coupons are paid out? (Note: That is, including the distributions in the form of coupons.)
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