On December 31 st , 2015 you decided to buy a 30 year Government of Canada bond.
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Question:
On December 31st, 2015 you decided to buy a 30 year Government of Canada bond. The bond had a face value of $100,000. The coupon rate on the bond was 5%. Coupons were paid semi-annually. On December 31st, 2019 the yield to maturity on Government of Canada bonds was 4.5% per year. (The term structure of interest rates was flat.)
After holding the bond for 4 years you decided to sell the bond on December 31st, 2019. Prior to selling the bond you received the December 31st, 2019 coupon payment. On December 31st, 2019 the yield to maturity on Government of Canada bonds decreased to 3.5% per year. (The term structure of interest rates was flat.)
- How much did you pay for the bond on December 31st, 2015?
- How much did you sell the bond for on December 31st, 2019?
- What was the effective annual rate of return that you earned on your investment during the 4 years?
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