Question
Bond 1 has a 4% annual coupon rate, $1000 maturity value, n = 6 years , YTM = 4% (pays a $40 annual coupon at
Bond 1 has a 4% annual coupon rate, $1000 maturity value, n = 6 years, YTM = 4% (pays a $40 annual coupon at the end of each year and $1,000 maturity payment at maturity).
. Suppose for the Coupon Bond 1 above that has a 4% annual coupon rate, $1,000 maturity value and 6 years to maturity, rates go down to 3% right after you purchase the bond for the life of the bond, and you hold the bond to maturity. Thus, you have to invest each of your coupon payments at the 3% rate, when you hold the bond to maturity. What will be your annual compound yield if the bond is held to maturity? Hint: Recall FV of Bond Coupons Reinvested for 6 years = Coupon Payment (FVIFA 3%, 6) ACY ={[(FV of Coupons +Maturity Value)] / (Bonds Price)] ^1/n } - 1, where n = 6 years Annual Compound Yield for Bond 1 at the End of Year 6 ____________
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started