Question: Assume that you pay $850 for a long-term bond that carries a 71/2% coupon. Over the course of the next 12 months, interest rates drop

Assume that you pay $850 for a long-term bond that carries a 71/2% coupon. Over the course of the next 12 months, interest rates drop sharply. As a result, you sell the bond at a price of $962.50.
a. Find the current yield that existed on this bond at the beginning of the year. What was it by the end of the 1-year holding period?
b. Determine the holding period return on this investment.

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a As the price of the bond went up the current yield dropped to 77... View full answer

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