Consider a 10-year 5.5% coupon bond currently yielding 6% with semiannual compounding. What is the 5...

 

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Consider a 10-year 5.5% coupon bond currently yielding 6% with semiannual compounding. What is the 5 year total return of a position of $100,000 face in each of the following 3 cases: (a) Case 1: Reinvestment rates is 4.5% for 2 years, then 3.5% until year 5. Bond is priced at a 4.5% yield at year 5. (b) Reinvestment rates is 4.5% for 1 year, then 5.5% until year 5. Bond is priced at a 6.75% yield at year 5. (c) Reinvestment rates is 4.5% for 3 years, then 3% until year 5. Bond is priced at a 3.75% yield at year 5. Consider a 10-year 5.5% coupon bond currently yielding 6% with semiannual compounding. What is the 5 year total return of a position of $100,000 face in each of the following 3 cases: (a) Case 1: Reinvestment rates is 4.5% for 2 years, then 3.5% until year 5. Bond is priced at a 4.5% yield at year 5. (b) Reinvestment rates is 4.5% for 1 year, then 5.5% until year 5. Bond is priced at a 6.75% yield at year 5. (c) Reinvestment rates is 4.5% for 3 years, then 3% until year 5. Bond is priced at a 3.75% yield at year 5.

Answer rating: 100% (QA)

Answer a The total return after 5 years is 443 b The total return after 5 years is 573 c The total return after 5 years is 486 Stepbystep explanation ... View the full answer