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A buy-hold investor purchases a 10-year, 10% annual coupon payment bond with a par value...

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Finance

A buy-hold investor purchases a 10-year, 10% annual coupon payment bond with a par value of $1000 and sells the bonds four years later. The investor believes that the yield to maturity for this bond should be 15%. The investor has the opportunity to reinvest the coupon payments at the 15% annual yield to maturity.

  1. What is the current price at which the investor will be willing to buy this bond?
  1. Determine the future value of the reinvested coupon payments, the price at which the investor will sell this bond four years later and the investors total return on the bond. Is the yield to maturity unchanged? Why?
  1. If the yield to maturity increases by 100 basis points before the first coupon payments is made, what happens to the future value of the reinvested coupon payments, the price at which the investor sells the bond four years later and the total return on the bond. Will the yield to maturity drop? Why?

(iii) Now if the yield to maturity drops by 100 basis points, calculate the future value of the reinvested coupon payments, the price at which the bond will be sold four years later and the total return on the bond. What happens to the yield to maturity on the bond and why

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