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Business, 10.02.2020 23:08 Sourcandy

Assume that the term structure is flat with a 20% rate. At the end of one year there is the possibility of a single, parallel shift in interest rates either to 24% or to 16% or rates could stay the same. Assume annual compounding. Suppose you have a two- year holding period. Under the three interest rate scenarios, what would be the future value of your investment at the end of two years for the following bond investments if you reinvest the coupon payments at the then-prevailing market rate?

A $1000, 2-year bond with a 20% coupon payment.
b. A $1000, 5-year bond with a 20% coupon payment (i. e., you sell the bond after two years).
c. A 2-year zero coupon bond with a face value of $1,440.

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