Question
At t=0, you purchase a seven-year, 7 percent coupon bond (paid annually) that is priced to yield 6 percent annually compounded (YTM = 6% annually
At t=0, you purchase a seven-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 five years (t=T=5 years).
Suppose that the market interest rate increases to 6.750 percent annually compounded (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 six years.
A.What is the total amount of sale proceeds from selling the bond at the end of your holding period (investment horizon) (t=T=5 years)? In other words, what is the selling price of bond at the end of your holding period (t=T=5 years)?
B.What is your continuously compounded holding period return at the end of your investment horizon (t=5) years?
(Roundoff your answer to four decimal places.)
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