Part B: At t=0, you purchase a four-year, 5 percent coupon bond (paid annually) that is priced to yield 6 percent continuously compounded (YTM = 6 % continuously compounded). The face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity risk). You are also given that your holding period (investment horizon) equals to 3.70 years (t=T=3.70 years). Suppose that the market interest rate changes to 5.50 percent continuously compounded during the first year of your purchase (within year 1), and it remains at that level for the remaining life of the bond. Assume that, the reinvestment rate for the first coupon payment is the new interest rate that is, 5.50 percent continuously compounded. In addition, you will reinvest the coupor payments in a zero-coupon bond. What is your continuously compounded Holding Period Return of your investment at the end of your investment horizon (t=3.70) years? (Round-off to four decimal places, to obtain as accurate answer as possible on Canvas.)
Part B: At t=0, you purchase a four-year, 5 percent coupon bond (paid annually) that is priced to yield 6 percent continuously compounded (YTM = 6 % continuously compounded). The face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity risk). You are also given that your holding period (investment horizon) equals to 3.70 years (t=T=3.70 years). Suppose that the market interest rate changes to 5.50 percent continuously compounded during the first year of your purchase (within year 1), and it remains at that level for the remaining life of the bond. Assume that, the reinvestment rate for the first coupon payment is the new interest rate that is, 5.50 percent continuously compounded. In addition, you will reinvest the coupor payments in a zero-coupon bond. What is your continuously compounded Holding Period Return of your investment at the end of your investment horizon (t=3.70) years? (Round-off to four decimal places, to obtain as accurate answer as possible on Canvas.)
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:Part B:
At t=0, you purchase a four-year, 5 percent coupon bond (paid annually) that is priced to
yield 6 percent continuously compounded (YTM = 6% continuously compounded). The
face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity
risk).
You are also given that your holding period (investment horizon) equals to 3.70 years
(t=T=3.70 years).
Suppose that the market interest rate changes to 5.50 percent continuously compounded
during the first year of your purchase (within year 1), and it remains at that level for the
remaining life of the bond.
Assume that, the reinvestment rate for the first coupon payment is the new interest rate
that is, 5.50 percent continuously compounded. In addition, you will reinvest the coupor
payments in a zero-coupon bond.
What is your continuously compounded Holding Period Return of your investment at the
end of your investment horizon (t=3.70) years?
(Round-off to four decimal places, to obtain as accurate answer as possible on Canvas.)
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