Reference no: EM131444311
You bought EMU bond: 5-year, coupon= 12%, paid semi-annually, par= $1,000, and YTM = 8%
1. Compute:
a. What price did you pay for the bond?
b. You sold the bond at the end of 4-years. You have also been reinvesting the coupon payments all along at the same 8% YTM rate. What is your wealth at the end of 4-years?
2. What is the duration of this Michigan bond
3. If interest rate does not change after you buy the bond, what YTM would you earn if you owned the bond
a. For 4 years?
b. For 5 years?
4. If the YTM of Michigan Bond changes immediately upon purchase to 7.90%:
a. Estimate the current price of the Michigan bond using modified duration relationship
b. Estimate your wealth at the end of 4-years, if you sold the bond then, and have been reinvesting the coupon payments all along at the same 7.90% YTM rate.
c. Comment about the similarity or lack thereof between your answers of 1(b) and 3(b).
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