. An investor buys a 10 year, 8% annual coupon bond at par (so the yield-to-maturity...

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An investor buys a 10 year, 8% annual coupon bond at par (so the yield-to-maturity must be 8%), and sells it after three years (just after the coupon is recieved). Interest rates rise immediately after the purchase, and the bond’s yield-to-maturity jumps to 10% and remains there for the rest of the three year period. Assume coupons are reinvested at the new yield-to-maturity.

Show the components of the investor’s “total return,” or portfolio value at the end of the three year period. Your answer should include dollar values for the receipt of scheduled payments, the reinvestment income, and the sale price of the bond. Base your calculations on $100 par value.

What is the investor’s “horizon yield”, or realized rate of return, expressed on an annualized basis? If it is different from the bond’s original yield-to-maturity, what explains the difference?

Expert Solution

jeff jeffy answered 1 year ago

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