What rate of return does investor a earn

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Question - A bond dealer wishes to make a profit from coupon stripping. The dealer buys a $10,000,000 3-year corporate par value bond that pays semi-annual interest at j2 = 8% and pays $10,000,000 for the bond. The dealer then strips the coupons and sells each of them separately, along with selling the resulting strip bond. The dealer will sell the coupons and the strip bond at the following yield rates (all are j2):

Maturity 0.5 years 1.0 years 1.5 years 2.0 years 2.5 years 3.0 years

Yield (j2) 3.4% 4.0% 4.6% 5.0% 5.4% x%

(b) A 10-year $100,000 bond, redeemable at 103, paying interest at j2 = 7%, is sold to Investor A, who wishes to yield j2 = 7%. Investor A strips the coupons. She sells the strip bond to Investor B who wishes to yield j12 = 6.6%. Investor A keeps the first 5 years of coupons, but sells the last 5 years worth of coupons to Investor C who wishes to yield j4 = 6%. What rate of return does Investor A earn on her investment?

Reference no: EM132820594

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