The expected return for the initial two-year holding period is based on the presumed spot curve over the remaining three years of the bond.
The formula used: [(7 + (1/1.08) + (1/1.08^2) + (107/1.08^3) ) / 100] - 1 = 4.42%
I don’t understand this formula and I don’t recall seeing it in the books. Any references?
Why isn’t it [( (7/1.08) + (7/1.08^2) + (107/1.08^3) ) / 100] - 1
This PDF answer provided is absolutely unclear. But there is no mention of 4.42%… ?
“Presuming that the forward curve shifts higher as anticipated by Bird, the fair value of the bond is $97.42.” I’m good with that.
But then I get a total return over the two-years horizon of 4.93% (after the curve shifts up), while the answer says it is -1.86%. No clue how they got that number.
with IRR of CF0 = -101.5 , CF1 = 7, and CF2 = (97.42+7) ==> IRR 4.93%
Anyone can help? Q2 of Fixed income Scott.
I am also confused here, one question to you guys
I understand how we get 97.42 , as he holds for 2 years, the price of bond is the PV of future coupons and face value
If I want to calculate the 2 period return, wouldnt i calculate my coupon reinvestments? for example 7 in year 1 which should be reinvested at the interest rate at that time and 7 in year 2 which we get as coupon
So my total; if I sell the bond after year 2 should be 97.42 ( price of bond) + coupon reinvestments which are 7*1.04 + 7 ? Where am getting wrong?
Anyone?