Question
Suppose a semiannual bond was issued several years ago when the interest rate was 7%. The bonds annual coupon rate was thus set at 7%.
Suppose a semiannual bond was issued several years ago when the interest rate was 7%. The bonds annual coupon rate was thus set at 7%. With 8 years left in bonds life, the interest rate is 6% per year until the end of maturity. (Show your calculations but do not use excel or financial calculator for it.)
A. What is the price of the bond 8 years prior to expiration?
B. What will be the bonds price six years prior to maturity?
C. An investor purchases the bond eight years prior to maturity and sells the bond six years prior to maturity. What is the total return of the investor from investing into the bond? What conclusion can you draw from the return?
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