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You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the
You want to make a 5-year investment on bonds, and if you buy bonds with longer period
of maturity, they will be sold at the prevailing market price at the end of the fifth year.
All coupons will be reinvested. You forecast that the rates are going to change after you
purchase the bonds.
Now you have three bonds with same initial YTM to consider:
A. 5-year maturity, 6% coupon paid annually, YTM=9%
B. 10-year maturity, 8% coupon paid annually, YTM=9%
C. 15-year maturity, 4% coupon paid annually, YTM=9%To pick the best one, you want to
calculate the following (show your work to get full credit, keep four decimals):
2) If the coupon payments are reinvested at the prevailing market rate (7% for the coming
5 years), what are the future values (at the end of the fifth year) of all five coupon
payments for three bonds respectively?
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