Suppose that you buy today a three-year risk-free bond with a face value of $1,000 and an
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Question:
Suppose that you buy today a three-year risk-free bond with a face value of $1,000 and an annual coupon rate of 8%. Also, assume that the yield curve will remain the same for the next two years.
(a) What is the today's price of the bond?
(b) At what price shall you expect the bond to be trading in a year from now? in two years from now?
(c) What would be your rate of return if you were to sell the bond in a year from now just after collecting the coupon?
(d) Now, suppose that you buy the bond in a year from now just after the first coupon is paid, hold it for a year and then sell just after collecting the second coupon. What would be your rate of return?
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