Question
Consider the 4.625 bond maturing 8/15/2023 quoted in the following table (settlement: 2/15/2022). Assume you purchase the bond on 2/15/2022, and you sell it on
Consider the 4.625 bond maturing 8/15/2023 quoted in the following table (settlement: 2/15/2022).
Assume you purchase the bond on 2/15/2022, and you sell it on 8/15/2023. Let y denote the yield to maturity on the bond at the time of purchase.
Calculate the (annualized) rate of return on your investment under the following scenarios:
(1) interest rates do not change: r = y
(2) interest rates increase: r = y + 50 basis points
(3) interest rates decrease: r = y 50 basis points
(4) coupon payments are reinvested at the forward rates, and the bond is sold at the forward price (use the implied forward rate calculated from bond prices). You should verify that the rate of return equals the spot rate for the maturity equal to the length of the holding period, y3
\begin{tabular}{ccc} Rate & Maturity & Price \\ \hline 687 & 8/15/2022 & 101:20 \end{tabular} 5214852/15/20238/15/2023101:18100:21Step by Step Solution
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