Assume that all interest rates are certain - all investors know how interest rates will change...

 

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Assume that all interest rates are certain - all investors know how interest rates will change over time. Three years ago, you purchased a 10-year bond with a face value of $1,000.00 and annual coupons of 7.9%. One year after you purchased the bond, the one year spot rate was 4.4% and the two year spot rate was 5.6%. You reinvested the first two coupon payments at the prevailing rates and then sold the bond after three years at a yield to maturity of 9.5%. If your realised compound yield on the bond was 14.4%, what was the bond's initial purchase price? Assume that all interest rates are certain - all investors know how interest rates will change over time. Three years ago, you purchased a 10-year bond with a face value of $1,000.00 and annual coupons of 7.9%. One year after you purchased the bond, the one year spot rate was 4.4% and the two year spot rate was 5.6%. You reinvested the first two coupon payments at the prevailing rates and then sold the bond after three years at a yield to maturity of 9.5%. If your realised compound yield on the bond was 14.4%, what was the bond's initial purchase price?

Answer rating: 100% (QA)

Solving for the Bonds Initial Purchase Price We can solve this problem by working backwardsfocusing ... View the full answer