You are looking to purchase a 3.6% coupon bond (with semiannual coupons), par value of only $800, with a maturity of exactly 3 years. The next coupon payment will occur in 6 months. You have the following information on the yield curve (APR8 compounded annually): 1. Maturity (in years) T-strip APR 2.0% 0.5 97:24 1.0 1.5 96:12 2.0 2.7% 2.5 2.85% 3.0 2.95% What is the price of this bond? а. b. What is your estimate of the YTM of this bond (to within 0.1%)? Explain your reasoning? You purchase the bond at the price you calculated in part (a). Immediately after the purchase, the Federal Reserve issues a statement that spooks the bond market, and prices fall. You see that the YTM of the bond has jumped to 6.5% APR (compounded annually). You decide that you should now sell this bond. What return would you have earned on this bond during the brief period in which you owned it? с.
You are looking to purchase a 3.6% coupon bond (with semiannual coupons), par value of only $800, with a maturity of exactly 3 years. The next coupon payment will occur in 6 months. You have the following information on the yield curve (APR8 compounded annually): 1. Maturity (in years) T-strip APR 2.0% 0.5 97:24 1.0 1.5 96:12 2.0 2.7% 2.5 2.85% 3.0 2.95% What is the price of this bond? а. b. What is your estimate of the YTM of this bond (to within 0.1%)? Explain your reasoning? You purchase the bond at the price you calculated in part (a). Immediately after the purchase, the Federal Reserve issues a statement that spooks the bond market, and prices fall. You see that the YTM of the bond has jumped to 6.5% APR (compounded annually). You decide that you should now sell this bond. What return would you have earned on this bond during the brief period in which you owned it? с.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:You are looking to purchase a 3.6% coupon bond (with semiannual coupons), par value of
only $800, with a maturity of exactly 3 years. The next coupon payment will occur in 6
months. You have the following information on the yield curve (APR8 compounded
annually):
1.
Maturity
(in years)
T-strip
APR
2.0%
0.5
97:24
1.0
1.5
96:12
2.0
2.7%
2.5
2.85%
3.0
2.95%
What is the price of this bond?
а.
b. What is your estimate of the YTM of this bond (to within 0.1%)? Explain your
reasoning?
You purchase the bond at the price you calculated in part (a). Immediately after the
purchase, the Federal Reserve issues a statement that spooks the bond market, and
prices fall. You see that the YTM of the bond has jumped to 6.5% APR (compounded
annually). You decide that you should now sell this bond. What return would you
have earned on this bond during the brief period in which you owned it?
с.
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