Calculate the realized annual rate of return for each interest rate scenario

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What does strategy number three illustrate

 

1.For strategy number three calculate the value on October 4, 2018 for each interest scenario.

 

2.For strategy number three calculate the interest on the coupons for each interest rate scenario.

 

3.Calculate the realized annual rate of return for each interest rate scenario.

 

4.What does strategy number three illustrate

 

Assume receipt of 75.9% of the coupon in 2018, since the bond will be held for 75.9% of that year.

 

Assume reinvestment of coupon at 10% until 2015, then reinvestment at the prevailing market yield until October 4, 2018.

 

12% indicates 10% for the first three years and 12% after that.

10% indicates 10% for the entire time period.

8% indicates 10% for the first three years and 8% after that.

 

Beginning of holding period: January 1, 2012

YTM = 10% on January 1, 2012; There is a flat yield curve.

End of holding period is October 4, 2018.

Length of holding peirod is 6.759 years.

Duration = 6.759 years

 

Strategy Three: Buy a 10% Bond with a 10 year maturity as of January 1, 2012.

Sell the bond on October 4, 2018.

 

Market Yield in 2015            Bond value on    Interest on Coupons      Yield

and Beyond                     October 4, 2018

 

12%                           ?                   ?                   ?

 

10%                           1000.56        229.44                10.01

 

8%                      ?                   ?                   ?

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