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Lenora current holds a 10-year maturity bond. She decides to sell her bond at the end of her investment horizon, which is before the maturity
- Lenora current holds a 10-year maturity bond. She decides to sell her bond at the end of her investment horizon, which is before the maturity of the bond. The bond has a Macaulay duration of 7 years. Based on the What-if analysis results presented in the table below, is Lenoras investment horizon longer than the 7 years, less than 7 years, or equal to 7 years?
Does coupon reinvestment risk matter more to Lenora, or market price risk matters more, or almost no interest rate risk to Lenora over her investment horizon? Please explain your answers. [5 Marks]
Lenoras bond | YTM (%) | FV of reinvested coupon at the end of investment horizon | Bond's price if sold at the end of investment horizon | FV of reinvested coupon plus sale price of bond at the end of investment horizon |
Scenario 1 | 9.00% | $73.60 | $97.47 | $171.07 |
Scenario 2 | 6.00% | $67.15 | $105.35 | $172.50 |
Scenario 3 | 12.00% | $80.71 | $90.39 | $171.10 |
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