Question
You plan on investing your money in a five-year 6% bond with annual coupon payments. The face value of the bond is 1000 and the
You plan on investing your money in a five-year 6% bond with annual coupon payments. The face value of the bond is 1000 and the current yield on that bond is 3%. You plan on holding the bond for exactly a year and selling it immediately after the coupon is paid.
a. (7 points) what price will you pay for the bond?
b. (6 points) Suppose that the yield on the bond goes down to 2% at the time you sell it. What return will you realize on your investment?
c. (6 points) What should be the yield on the bond when you sell it so that you realize 10% return?
d. (6 points) Provide an explanation only. Would your realized returns in (b) be higher or lower if instead of holding a five-year 6% bond, you held a six-year 3% coupon bond? Explain
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