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Consider a bond that promises the following cash flows. The yield to maturity is 12%. You plan

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Consider a bond that promises the following cash flows. The yield to maturity is 12%.



Consider a bond that promises the following cash flows. The


You plan to buy this bond, hold it for 2.5 years, and then sell the bond.
a. What total cash will you receive from the bond after the 2.5 years? Assume that periodic cash flows are reinvested at 12%.
b. If immediately after buying this bond all market interest rates drop to 11% (including your reinvestment rate), what will be the impact on your total cash flow after 2.5 years? How does this compare to part (a)?
c. Assuming all market interest rates are 12%, what is the duration of thisbond?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Year Promised Payments 160 180 170 1S0 230

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a You will receive 160 reinvested for 15 years and 170 reinvested for 05 years Then you w...View the full answer


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Financial Markets And Institutions

Financial Markets And Institutions

ISBN: 978-0132136839

7th Edition

Authors: Frederic S. Mishkin, Stanley G. Eakins

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Related Video

Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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