An investor paid $95 for a bond with face value $100 maturing in six months. When will the bond value reach $99 if the interest rate remains constant?
Question 2.28: An investor paid $95 for a bond with face value $100 maturin...
We solve the equation
100 = 95 (1 + r)^{\frac{1}{2} }
for r to find the implied effective rate to be about 10.80%. If this rate remains constant, then the bond price will reach $99 at a time t such that
100 = 99(1 + r)^{(\frac{1}{2} -t)}
The solution is t ≅ 0.402 years, that is, about 0.402×365 ≅ 146.73 days. The bond price will reach $99 on day 147.
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