An investor purchased a 3 year annual coupon bond one year ago. Its PAR value is...

An investor purchased a 3 year annual coupon bond one year ago. Its PAR value is $1,000 and coupon rate is 6%, paid annually. At the time you purchased the bond, its yield to maturity was 6.5%. The investor sells the bond now after receiving the first coupon payment.
(a) What is the annual Realised Compound Yield (RCY) from holding the bond for 1 year if the yield to maturity remains at 6.5%?
(b) What if the yield to maturity becomes 6.0% when the investors sells the bond?
(c) DC is attempting to construct a bond portfolio with a Macaulay duration of 9 years. He has $1,000,000 to invest and is considering allocating it between two zero coupon bonds. The first zero coupon bond is exactly 6 years, and the second zero coupon bond is exactly 16 years. Both of these bonds are currently offering at a market price of $100. If the yield curve is flat at 7.5%, duration will remain unchanged. Is it possible for DC to construct a bond portfolio having a duration of 9 years using these two types of zero coupon bonds? If possible, how? (Describe the actual portfolio on your working.) If not, why not?

Expert Solution

jeff jeffy answered 2 years ago

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