At t=0 , you purchase a six-year, 5 percent coupon bond (paid annually) that is priced to yield 6…
At t=0, you purchase a six-year, 5 percent coupon bond (paid annually) that is priced to yield 6 percent continuously compounded (YTM = 6% continuously compounded). The face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity risk). You are also given that your holding period (investment horizon) equals to 5.40 years (t=T=5.40 years). Suppose that the market interest rate changes to 5.50 percent continuously compounded during the first year of your purchase (within year 1), and it remains at that level for the next five years. Assume that, the reinvestment rate for the first coupon payment is the new interest rate, that is, 5.50 percent continuously compounded. In addition, you will reinvest the coupon payments in a zero-coupon bond. What is the total amount (total proceeds) in US Dollars in your investment account at the end of your investment horizon (t=5.40) years? Total proceeds is the sum of amount from reinvestment of coupon payments and the face value. May 05 2022 06:10 PM
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