Eric bought a 4% coupon rate, Government of Canada bond when the

Eric bought a 4% coupon rate, Government of Canada bond when the

Subject: Business    / Finance
Question

Eric bought a 4% coupon rate, Government of Canada bond when the bond had 10 years left until maturity. When Eric bought the bond it offered investors a yield-to-maturity of 3%. These bonds pay interest semi-annually.

One year after purchasing the bond, Eric was able to sell the bond, but the yield-to-maturity had risen to 4%.

you don’t have to concern yourself with taxes.

a. What price did Eric pay when he purchased the bond? (Show your formula and solution using MS Equation.)

b. What price did Eric get when he sold the bond? (Show your formula and solution using MS Equation.)

c. What was the dollar return that Eric earned on his bond investment? (Show your formula and solution using MS Equation.)

d. What was capital gain (loss) yield earned on this bond investment? (Show your formula and solution using MS Equation.)

e. Was the capital gain (loss) yield a realized return? Explain.

f. What was the income yield? (Show your formula and solution using MS Equation.)

g. What was the total return? (Show your formula and solution using MS Equation.)

h. What type of calculation was the ‘total return’ used in part g of this question (ex post or ex ante)? Explain.