Question

An-investor initially purchases a 5-year, 6% annual coupon payment bond at par value of $100. Assume the interest rates go up by 1% right after the first coupon is received and then go down by 2% right after the fourth coupon is received. Assume the term structure is flat and coupon payments are reinvested in zero-coupon bonds that mature at the end of investment horizon.

a) What is investor's realized rate of return if he holds the bond until maturity?

b) What is investor's realized rate of return if he sells the bond after four years?

Answer 1

Answer:

The answer  a) is  5%

b) is 7%

Explanation:

First of all if the bond is negociated  at par  means that the coupon rate is the same that the return rate  so, is 6%  after first coupon payment it ups to 1%, then 6+1 =7%   and after fourth  coupon payment is 7%- 2% = 5%.