Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

How does an increase in interest rates affect a securitys duration? You have five years until you need to take your money out of your

How does an increase in interest rates affect a securitys duration?

You have five years until you need to take your money out of your investments to make a planned expenditure. Right now bonds are promising an 8 percent return. You buy a five-year duration bond. After you buy the bond, interest rates fall to 6 percent and stay there for the full five years. You reinvest the coupons and earn 6 percent. Will your realized return be more or less than the originally promised 8 percent? Explain.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_step_2

Step: 3

blur-text-image_step3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions