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Lenora current holds a 10-year maturity bond
- Lenora current holds a 10-year maturity bond. She decides to sell her bond at the end of her investment horizon, which is before the maturity of the bond. The bond has a Macaulay duration of 7 years. Based on the What-if analysis results presented in the table below, does coupon reinvestment risk matter more to Lenora, or market price risk matters more, or almost no interest rate risk to Lenora over her investment horizon?
Is Lenora’s investment horizon longer than the 7 years, less than 7 years, or equal to 7 years? Please explain your answers. [5 Marks]
|
Lenora’s bond |
YTM (%) |
FV of reinvested coupon until end of investment horizon |
Bond's price if sold at the end of investment horizon |
FV of reinvested coupon plus sale price of bond |
|
Scenario 1 |
9.00% |
$104.17 |
$99.08 |
$203.25 |
|
Scenario 2 |
6.00% |
$91.93 |
$101.89 |
$193.82 |
|
Scenario 3 |
12.00% |
$123.33 |
$95.58 |
$218.90 |
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