Suppose that an investor with a 3-year investment horizon is considering buying an 8-year 6%...
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Suppose that an investor with a 3-year investment horizon is considering buying an 8-year 6% coupon bond selling at par (semi-annual coupon payments). The investor expects that she can reinvest the coupon payments at an annual interest rate of 7%, and at the end of the investment horizon, five-year bonds will be selling to offer a YTM of 9%.
1.How much is the coupons & interest earned on reinvesting these coupon by the end of 3-yr?
2.What is the sale price of the bond by the end of 3 year? (hint: you need to discount the cash flows between year 3 and year 8 using the appropriate rate)
3.What is the (annualized) expected holding period return for this bond?
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