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Suppose you are considering the purchase of a Brady bond, a 10-year, 4% noncallable bond selling at $990.50 per $1000 of par value. Assume also
Suppose you are considering the purchase of a Brady bond, a 10-year, 4% noncallable bond selling at $990.50 per $1000 of par value. Assume also that your investment horizon is 4 years. You believe that the reinvestment rate range can vary from 4% to 7% and the discount rate at the end of the investment horizon can range from 3.5% to 7.5%. Use 50 bps grids to compute the various return scenarios. Identify all the scenarios that generate more than 5.5% annualized return.
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