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Evaluate the decision to sell the bond

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Reference no: EM132616420

Suppose you purchased a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years' time (immediately after the 10th coupon payment), the bond's yield to maturity has risen to 7%.

a. What is the price of the bond immediately after the 10th coupon payment? What is the price of the bond immediately before the 10th coupon payment? What is the bond's yield to maturity immediately before the 10th coupon payment?

b. If you sell the bond now (immediately after the 10th coupon payment), what internal rate of return will you have earned on your investment in the bond?

c. If instead you hold the bond to maturity, what internal rate of return will you earn on your investment in the bond?

d. Is comparing the IRRs in (b) versus (c) a useful way to evaluate the decision to sell the bond? Explain.

Reference no: EM132616420

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