Question
At time t=0, in the bond market you observe a regular coupon bond with the following characteristics: Face value: $1,000, Maturity: 6 years, Coupon payments:
At time t=0, in the bond market you observe a regular coupon bond with the following characteristics:
Face value: $1,000, Maturity: 6 years, Coupon payments: $90 payable yearly. The market interest rate (expected rate of return / YTM) is 10%. What is the bond price?
Suppose, you purchased this bond at t=0, and decided to hold till FIVE years. For the first three years after your purchase, the market interest rate remained at 10%. Then, just before the third coupon payment is due, the market interest rate (YTM) decreased by 100 basis points from its initial level, and it remained at that level till the maturity of the bond. What is the realized yield (annual holding period return) of your investment at the end of your investment horizon period of FIVE years? Assume that the reinvestment rate for the third coupon payment is 10%- 100 basis points.
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