Question
You owe a mobster in Chicago money in 5 years. You want to earn a little bit on money you set aside to pay this
You owe a mobster in Chicago money in 5 years. You want to earn a little bit on money you set aside to pay this liability. However, you do not know if interest rates will rise or fall. You have two bonds to choose from with semi-annual coupon payments:
| Bond A | Bond B | |
| Time to maturity (years) | 5 | 6 |
| Annual yield to maturity | 4.00% | 4.00% |
| Annual coupon payment | 40.00 | 65.94 |
| Current price | -1000 | -1000 |
| Face value | 1000 | 826.02 |
So we start with two bonds of equal price ($1000) and annual yield to maturity (4.00%).
Assume annual yield to maturity drops from 4.00% to 3.00%. What is the total ending wealth of both bond A and bond B?
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Principles Of Project Finance
Authors: E.R. Yescombe
1st Edition
0127708510, 978-0127708515
