Mike has a 2000 USD, he decides to invest some of it in US bonds. Mike lives in the US, the starting point is year 0. The real interest rate is estimated to be 2% at year 0. Some financial experts predict the real interest rate will rise to 2.2% in year 1, fall to 1.9% in year 2, fall to 1% in year 3, then fall to 0.1% in year 4 and then rise again to 2.5% in year 5. The fluctuations in price is due to an ongoing war in Europe impacting the energy market. The bond he decides to invest in has face value of 1000 and a market value of 1010, its coupon is 4%, the bond duration is from year 0 to year 5. The coupon is not fixed and due to those changes in real interest rates it adjusts proportionally (as in when real interest rate was 2% and the coupon rate was 4%, if the real interest rate changes to 1.9% the coupon will also decrease proportionally). 

Calculate and present the variable coupon rates from year 0 to year 5. 

Calculate and present the bond's PV and YTM. What is the opportunity cost of the remainder of Mike 2000 dollars after he bought the bond? 

How does this opportunity cost fluctuate across the years 0 to years 5? Is this a worthwhile investment for Mike?  Use your own values for those not provided, state them in your answer.

Answer rating: 100% (QA)

To calculate the variable coupon rates from year 0 to year 5 for the bond we need to adjust the coupon rate proportionally based on the changes in the ... View the full answer