FINANCE 420 – Suppose A-rated bonds were trading in the market at a YTM of 10% on all maturities

Suppose A-rated bonds were trading in the market at a YTM of 10% on all maturities, and you bought an A-rated, 10-year, 9% coupon bond with face value of $1,000 and annual coupon payments. Suppose that immediately after you bought the bond the yield on such bonds dropped to 8% on all maturities and remains there until you sold the bond at your horizon date at the end of four years.A) What price did you pay for the 10-year, 9% coupon bond?B) Show in a flow matrix the coupons you received on the bond and their values at your horizon date from reinvesting.C) What is the price of the original 10-year bond at your horizon date?D) What is your horizon date value and total return?

 

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