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You purchase a 20 year bond in the primary market with a 5% YTM, annual coupon payments and $1000 face value.
You purchase a 20 year bond in the primary market with a 5% YTM, annual coupon payments and $1000 face value. Immediately before the 5 th payment you need to sell the bond and the competitive market rate has risen to 9%.
a)Draw the cash flow diagram for the bond. Indicate where the new buyer enters the problem.
b)What does the bond sell for?
(c) What is the new YTM of the bond? explain.
(d) What is the rate of return for the seller? (write out the problem/equation you intend to solveand hazard an approximateguess here. It’s sufficient to say: ‘between x% and x+1%’, for example: “between 10% and 11%”. By the way, that’s not the answer.)
