The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'
The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'
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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Question
Transcribed Image Text:The interest rate changes to i' in the second period. Evaluate the rates of
return when you sell the bond after one period in the case of the change being
(i) anticipated (ii) unanticipated. ? [P'
Expert Solution
Part 1
For anticipated change in interest rate, bond holders know future response or change in risk and return. Bond investors intend to hold their bonds until its maturity and are less exposed to interest rate risk. This is because of two reasons:
- investors are not interested in interim price movements.
- the amount of principal that investor receives at maturity is unaffected by changes in interest rates.
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