BOND PRICES AND YIELDS


Assume an investor with a 5 year investment horizon is considering purchasing a 7 year 6% coupon bond selling at par. The investor expects to reinvest the coupons at 5% and that the bond will be selling to offer a yield to maturity of 4% in five years.



What is the expected total return for this bond? Express your answer on a bond-equivalent basis and an effective annual rate basis.



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