Question
At t= 0, you purchase a six-year, 7 percent coupon bond (paid annually) that is priced to yield 6 percent annually compounded (YTM = 6%
At t= 0, you purchase a six-year, 7 percent coupon bond (paid annually) that is priced to yield 6 percent annually compounded (YTM = 6% annually compounded). The face value of the bond is $1,000. The bond issuer is the U.S.government (no liquidity risk). You are also given that your holding period(investment horizon) equals to 5.12 years (t= 5.12 years).Suppose that the market interest rate increases to 6.750 percent annually com-pounded (increase by 75 basis points) during the first year of your purchase(within year 1), and it remains at that level (6.750 percent) for the next five years. What is the total amount in US Dollars in your investment account at the end of your investment horizon (t= 5.12) years? Assume that, the reinvestment rate for the first coupon payment is the new interest rate, that is, 6.750 percent annually compounded. In addition, you will reinvest the coupon payments in a zero-coupon bond.
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