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9 March, 17:58

Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places.

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  1. 9 March, 18:00
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    3.63%

    Explanation:

    Semiannual coupon payment

    = $100 : 2 = $50[ ($1,000 * 10%) : 2]

    The total number of compounding period = 2periods per year * 3 years = 6 periods.

    By entering the following data on a financial calculator, rate is calculated as 1.81%.

    Semiannual yield = 1.81%

    Annual yield = 1.81% * 2 = 3.63%
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