Suppose Safeco Company has just issued two bonds, of which one matures in 2 years and the other matures in 4 years. Both bonds are sold at $1,000 and both bonds have 8% coupon interest rate. Assume that your investment horizon is 4 years.
a. What are the YTMs on these two bonds.
b. Discuss the concept of bond reinvestment risk in general, and the reinvestment risk of the two bonds in particular.
c. If the market interest rate drops by three percentage points right after the issuance and remains at that level for the next 4 years, what are the expected annual rates of return on the 2-year bond and the 4-year bond over the next 4 years?

Answer rating: 100% (QA)

a Bond 1 YTM is calculated using RATE function in Excel nper 2 2 years remaining until maturity with ... View the full answer