Tom bought a ten-year bond with annual coupons of 10% and a face value of $ 1,000 at a YTM of 10%.
He decided to sell the bond after five years (i.e., after receiving 5 coupon payments) when the new YTM established on the bond market is 14%
1.What is the annual rate of return (bond yield) for Tom over the five years?
14%
10%
7.64%
2. What does Tom's example demonstrate?
Interest rate risk associated with bond investments
Credit risk associated with bond investments
Default risk associated with bond investments
3. Sam bought Tom's bond in year 5 and decides to hold it until maturity (year 10). What is the annual rate of return for Sam?
10%
7.64%
14%