Find the expected realized yield of the bond

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Reference no: EM131964122

Consider a 2-year coupon bond with coupon rate 10% and par 1000. The interest rate is 6%. Suppose that immediately after you bought the bond you got new information that next year there is a 50% probability that the one year interest rate will be 4% and 50% that it will be 6%.

Question: Find the expected realized yield of the bond.

Comment: The realized yield will be known at the end of the life of the bond. And expected realized yiled is what you expect the realized yield to be given the expected interest rate next period.

Reference no: EM131964122

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