12. 10-year rate and total dollar return (7 points)

Wall Street couldn't disagree more where Treasury will go next. In WSJ Economic Survey September 2020, the 10-year yield is forecasted to be as low as 0.5% or go up to as high as 2.7% in one year. Assume the current 10-year yield is 1%. All yields are BEYs.

a) Imagine you just bought a 1% coupon ten-year T-bond, how much you have paid for it? Assume a par of $100. The 1% coupon is paid semi-annually. (2 points)

b) You plan to hold the bond for ONE year. Assume the yield stays at 1% during the year but goes up to 2.5% the minute before you sell the bond at the end of the year. Compute the total dollar return and its three components (coupon interest, interest on interest, capital gain or loss) for your investment. What is the realized yield (BEY) of your investment? (5 points)