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What is holding period return from the investment

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Reference no: EM132487542

Point 1: You buy a bond today. The bond has a face value of $1000, will mature in 10 years, and pays coupon on an annual basis. The coupon rate is 8%, and the YTM is 10%. Assume that every time you receive a coupon you reinvest it. The annual reinvestment rate at the end of year 1 is equal to the YTM; it becomes 6% at the end of year 2 and 7% at the end of year 3. During year 4, the company starts to face financial distress, and becomes bankrupt. At the end of year 4, from the liquidation you are able to obtain 40% of the face value of the bond but no year 4 coupon.

Question 1: What is your 4-year holding period return from this investment?

Reference no: EM132487542

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