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Suppose that at time 0 you buy a 6%-coupon 30-year bond priced at par, and at time 6% bond 0.5 you sell this bond at
Suppose that at time 0 you buy a 6%-coupon 30-year bond priced at par, and at time | 6% bond | |||||||
0.5 you sell this bond at a price of 90% of par value. | Par | $1.00 | ||||||
Coupon | 6.00% | |||||||
a) What is your time 0.5 payoff per $1 of initial investment? | Maturity | 30 | ||||||
$0.93 | Time of sale | 0.5 | ||||||
Sale price | 90% | |||||||
Sell bond immediately after coupon payment: | ||||||||
payoff = coupon + sale proceeds = coupon + ex-coupon bond price | ||||||||
payoff = 0.06/2 + 0.90 = 0.93 | ||||||||
b) What is the rate of return on your investment (annualized, with semi-annual | ||||||||
compounding)? | ||||||||
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