Question
Consider a 4-year annuity bond with annual cash payment of $100. It does NOT have a face value. Currently, it sells for $316.98. 1. What
Consider a 4-year annuity bond with annual cash payment of $100. It does NOT have a face value. Currently, it sells for $316.98.
1. What is its yield to maturity?
2. You plan to buy this bond, hold it for two years, and then sell the bond. What total cash will you receive from the bond after you sell it in 2 years? Assuming that periodic cash flows are reinvested at 10% and the market interest rates remain the same for the entire 4 years.
3. If immediately after buying this bond all market interest rates increase to 12% (including your reinvestment rate), what will be the impact on your total cash flow at the end of your 2-year holding period?
4. Assuming all market interest rates are 10%, what is the duration of this 4-year bond? What will be the expected price change (in percentage term) if interest rates increase from 10% to 12% (please use the duration approximation formula)?
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