Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 5.5%. (i) What would be the price of the bond you will be paying if the market interest rate on similar bonds is 5%? What is the bond’s current yield? (ii) Now suppose you intend to sell the bond after two years of holding, but the market interest rate on similar bonds unexpectedly rises to 8%. How much would another investor be willing to pay for your bond? What was your rate of return on the bond?
Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 5.5%. (i) What would be the price of the bond you will be paying if the market interest rate on similar bonds is 5%? What is the bond’s current yield? (ii) Now suppose you intend to sell the bond after two years of holding, but the market interest rate on similar bonds unexpectedly rises to 8%. How much would another investor be willing to pay for your bond? What was your rate of return on the bond?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 9P
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b) Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 5.5%.
(i) What would be the price of the bond you will be paying if the market interest rate on similar bonds is 5%? What is the bond’s current yield?
(ii) Now suppose you intend to sell the bond after two years of holding, but the market interest rate on similar bonds unexpectedly rises to 8%. How much would another investor be willing to pay for your bond? What was your
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