Consider that the following table of spot rates is the prevailing term structure of interest...
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Consider that the following table of spot rates is the prevailing term structure of interest rates:
Year - Spot Rate
1 - 7%
2 - 7.60%
3 - 7.80%
4 - 8.20%
5 - 8.50%
Consider a 10% coupon bond with a face value of $1000 and four years to maturity. The bond pays a coupon on an annual basis. You buy the bond today. One year after buying the bond, you observe that all the spot rates have increased by 1%. After an additional year all spot rates again increase by 1% from their previous levels. At this point you decide to sell the bond. What is your profit or loss (in dollars) from this investment? Assume that you received both year 1 and year 2 coupons before you sold the bond, and that the year 1 coupon has been reinvested in a one year zero coupon bond that matures the day you sold the original bond.
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