Question
Ricky bought a 20-year 10% coupon bond at a yield to maturity of 8% today. The bond pays coupon interest twice a year and the
Ricky bought a 20-year 10% coupon bond at a yield to maturity of 8% today. The bond pays coupon interest twice a year and the first coupon payment will be made six month from today. Ricky plans to hold the bond until maturity and re-invest all coupons at the future interest rates. Future interest rates are expected to be: 10% (per annum, compounded semi-annually) between the beginning of year 1 to end of year 10; and 5% (per annum, compounded semi-annually) between the beginning of year 11 to end of year 20.
a. Calculate the price of the bond in percentage of its par value. (3 points)
b. Calculate the total future value of Ricky's bond investment at the end of the 20-year holding period. (6 points)
c. Compute the total return rate of the bond investment.
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a Calculation of the price of the bond in percentage of its par value The price of a bond is calculated using the following formula Price Present Valu...Get Instant Access to Expert-Tailored Solutions
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Fundamentals Of Corporate Finance
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
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0135811600, 978-0135811603
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