Arizona State University FIN FIN MISC At t=0, you purchase a seven-year, 7 percent coupon bond (paid…
At t=0, you purchase a seven-year, 7 percent coupon bond (paid annually) that is priced to yield 6 percent annually compounded (YTM = 6% annually compounded). The face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity risk).
You are also given that your holding period (investment horizon) equals to five years (t=T=5 years).
Suppose that the market interest rate increases to 6.750 percent annually compounded (increase by 75 basis points) during the first year of your purchase (within year 1), and it remains at that level (6.750 percent) for the next six years.
What is your continuously compounded holding period return at the end of your investment horizon (t=5) years? Hint: Your final answer is any number between 0.040 and 0.1000
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