A. You buy a 10-year US Treasury Bond with a coupon interest rate of 5% and Face Value of $1,000. You decide to sell your bond four years later when market interest rates have fallen to 4%. Find the selling price of the bond.
B. Calculate the Annualized Holding Period Return on the investment. Show your work.
A. The selling price will be calculated bybthe present value formula given as
PV = Price = 1000 x (0.05/1.04 + 0.05/1.04^2 + 0.05/1.04^3 + 0.05/1.04^4 + 0.05/1.04^5 + 1.05/1.04^6) = 1052.42
B. To calculate this, we need to find the initial price of the bond
Price = 1000 x (0.05/1.04 + 0.05/1.04^2 + 0.05/1.04^3 + 0.05/1.04^4 + 0.05/1.04^5 + 0.05/1.04^6 + 0.05/1.04^7 + 0.05/1.04^8 + 0.05/1.04^9 + 1.05/1.04^10) = 1081.10
Hence the holding period return will be = (1052.42 - 1081.1 + 50 x 4)/1081.1 = 15.846%
The annualized return will be = 1.15846^0.25 - 1 = 3.745%
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