Question
The AIF Company issued a 10-year bond at par (F = $1,000) that pays a coupon of 10% on an annual basis, and is callable
The AIF Company issued a 10-year bond at par (F = $1,000) that pays a coupon of 10% on an annual basis, and is callable at $1,100. Suppose you bought the bond when it was issued, and at the time of your purchase suppose the yield curve was flat and continued to remain at that level during years 1-4. However, at the start of year 5 (or end of year 4), suppose the yield curve dropped to 8% and AIF called the bond. Assume you reinvest your investment funds in a new six-year bond at par and the yield curve remains flat at 8%. What is your total return for the call period? What is your total return for the 10-year period? How do the total returns compare to the YTM when you purchased the bond?
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