Suppose you invest in a 5 year coupon bond with a coupon, Ask an Expert

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Suppose you invest in a 5 year coupon bond, with a coupon rate of 5%. Coupons are paid once a year and the par value is 1000. The interest rate today is 4%. Assume your investment horizon is 5 years.

1. What is the price of the bond today?

2. Suppose that one year has passed and now the interest rate fell to 2% and you know for sure it will stay that way for all subsequent years. Will you prefer to keep that bond until maturity or sell it now and buy a 4-year zero coupon bond (assume you can buy fractions of a bond, for example half a bond etc.)?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92801431

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