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(b) Michael just bought a 10-year bond with $1,000 par value, priced at $1,100. The unique feature of this bond is that the coupons are
(b) Michael just bought a 10-year bond with $1,000 par value, priced at $1,100. The unique feature of this bond is that the coupons are stepped up or increase over time. The bond pays $5 per quarter for 4 quarters (during the 18 year), $10 per quarter for 8 quarters (during the 2nd and 3rd year), $X per quarter for 12 quarters (during the 4th 6th year) and finally $25 per quarter for 16 quarters (during the 7th to 10th year). to (i) Michael expects that after 3 years, the yield to maturity of this bond (for the remaining 7 years) to be 4% per annum (quarterly compounding) and the bond to be priced at $1,285.96 at that time. Calculate the value of $X. (8 marks) (ii) If, as anticipated by Michael, the price after 3 years is actually at $1,285.96, calculate the actual realized yield of this bond (in % per annum) over the 3-year investment period. (4 marks)
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