A bank has a planned 2-year investment horizon. It is considering investing in a 2-year bond that pays 6% annually versus investing in a 4-year bond that pays 6.5% annually and then selling it after two years. The annual coupon payments can be reinvested at 4%.
What will be the realized compound yield if the bank invests in the 2-year security and holds it until maturity?
a. 4.00%
b. 5.48%
c. 5.94%
d. 6.01%
e. 6.85%
Answer: C
What will be the realized compound yield if the bank invests in the 4-year security and sells it at the end of two years, assuming interest rates remain unchanged?
a. 4.00%
b. 5.48%
c. 5.94%
d. 6.01%
e. 6.85%
Answer: e