Consider a bond that promises the following cash flows.
year 0 : 170
year 1: 170
year 2 : 180
year 3: 190
year 4: 230
The yield to maturity is 10%. You plan to buy this bond, hold it for 2 years, and then sell it.
a. What is the total cash you will receive from holding the bond for 2 years? Assume that cash flows are reinvested at 10% yearly interest rate.
b. If, instead, immediately after buying this bond all market interest rates drop to 9% (including your reinvestment rate), how would this affect your total cash flow after 2 years? How does this compare to part (a)?