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Setup A: Bill, a plumber, owns a bond with a $1,000 par value, a 7.00 percent coupon rate paid annually, three years remaining to maturity,
Setup A: Bill, a plumber, owns a bond with a $1,000 par value, a 7.00 percent coupon rate paid annually, three years remaining to maturity, and a 9.00 percent yield to maturity. When the government releases new economic numbers tomorrow, Bill believes the interest rate on this type of bond will fall 150 basis points and there will be a parallel shift in the yield curve. |
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If Bill is correct and the yield to maturity falls 100 basis points tomorrow.
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If Bill is wrong and the yield to maturity increases 75 basis points tomorrow.
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