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Suppose a portfolio manager is considering the purchase of a bond, a 12-year, 8% non-callable bond selling at $1050 per $1000 of par value. Assume also that the portfolio manager’s investment horizon is 5 years. The portfolio manager believes the reinvestment rate range can vary from 3% to 6% and the discount rate at the end of the investment horizon from 4% to 6%. Use 50 bps grids to compute the various return scenarios. Identify all the scenarios that generate less than 4% annualized return.
