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please answer question 2 Suppose that the term structure is currently flat so that bonds of all maturities have yields to maturity of 10%. Currently
please answer question 2
Suppose that the term structure is currently flat so that bonds of all maturities have yields to maturity of 10%. Currently a 5-year coupon bond with annual coupons (with the first one due in 1 year) and face value of $1,000 is selling at par.
- What is the current price of the 5-year bond? What are the annual coupons in dollar terms? $100
- A year from now interest rates will depend on the stance of monetary policy. If monetary policy is "tight" the yields to maturity on all bonds will be 12%. If monetary policy is "loose" the yields to maturity on all bonds will be 8%. If you sell the bond a year from now when monetary policy is tight what will be the return to your investment over the year? If you sell the bond a year from now when monetary policy is loose what will be the return to your investment over the year? Please compute 1-year returns before coupons are paid out.
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