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Interest rate at time t: it = 6.5% Interest rate at time t+1: it+1 =...

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Finance

Interest rate at time t: it = 6.5%

Interest rate at time t+1: it+1 = 10%

Price of the bond at time t: Pt = $892.17

Bond's term to maturity at time t = 10years

Face value = $1000

Coupon rate = 5%

(i) Calculate the Yield to Maturity.

(ii) Briefly explain why the yield to maturity is different from the coupon rate.

(iii) Suppose that an investor purchases this bond in period t. She holds the bond for only one year and sells the bond in period t+1. Calculate the investor's holding period return.

(iv) Explain the concept of interest rate risk, and describe why the investor in part iii of the question faces a high interest rate risk.

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