a) Suppose we have a 5-year investment horizon and we consider a 10-year 12% coupon bond with face value of $1,000. The yield to maturity of the 10-year bond right now is 10%. The future required yield on the bond 5 years from today is 9%. The bond makes semi-annual coupon payments. Our reinvestment rate for the next 5 years is assumed to be 9%. What is the total return over the investment horizon? b) Same information as above, except that the reinvestment rate is assumed to be 6% in the first two years, 12% in the subsequent 3 years, and the future required yield on the bond at t = 5 is assumed to be 12%. Investment horizon is still 5 years. What is the horizon return then?
a) Suppose we have a 5-year investment horizon and we consider a 10-year 12% coupon bond with face value of $1,000. The yield to maturity of the 10-year bond right now is 10%. The future required yield on the bond 5 years from today is 9%. The bond makes semi-annual coupon payments. Our reinvestment rate for the next 5 years is assumed to be 9%. What is the total return over the investment horizon? b) Same information as above, except that the reinvestment rate is assumed to be 6% in the first two years, 12% in the subsequent 3 years, and the future required yield on the bond at t = 5 is assumed to be 12%. Investment horizon is still 5 years. What is the horizon return then?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:a) Suppose we have a 5-year investment horizon and we consider a 10-year 12%
coupon bond with face value of $1,000. The yield to maturity of the 10-year bond
right now is 10%. The future required yield on the bond 5 years from today is 9%.
The bond makes semi-annual coupon payments. Our reinvestment rate for the next
5 years is assumed to be 9%. What is the total return over the investment horizon?
b) Same information as above, except that the reinvestment rate is assumed to be 6%
in the first two years, 12% in the subsequent 3 years, and the future required yield
on the bond at t = 5 is assumed to be 12%. Investment horizon is still 5 years. What is
%3D
the horizon return then?
6.
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