You hold a bond with duration of 15. Its yield is 7% while the cash (one-year)...
You hold a bond with duration of 15. Its yield is 7% while the cash (one-year) rate is 3%. You expect yields to move down by 15 basis points over the year. Give a rough estimate of your expected return. What is the risk premium on this bond? Show your work. (6 points)
Homework Answers
Expected return = bond yield + (duration*change in yield) = 7% + (15*0.15%) = 9.25%
Risk premium = expected return - cash rate = 9.25% - 3% = 6.25%
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