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please help need it asap Interest rate risk has two (2) components: price (value) risk and reinvestment risk. Consider a bond that matures exactly 5
please help need it asap
Interest rate risk has two (2) components: price (value) risk and reinvestment risk. Consider a bond that matures exactly 5 years from now, pays a 4% annual coupon and has a $100 par (face) value. a.) Suppose the current market price of the bond is $91.58, what is the annual rate of return ('yield to maturity') implied by this price? b.) Suppose that an investor with a 2-year investment horizon purchases the bond above (for $91.58 ) and will sell it exactly two (2) years from today. Immediately after this investor purchases the bond, all interest rates (yields) in the economy rise to 10\%. Compute the 2-year (horizon) return for this investor. c.) Comparing your answers in parts a.) and b.) above, how did the increase in yields to 10% ) affect this investor with the 2-year investment horizon. Is your answer in part c.) above the result of price (value) risk or reinvestment sk Step by Step Solution
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