In April 2014, Greece managed to sell some €3 billion in new five-year bonds at a yield of just 4.95%.
Answer the following questions (show all calculations):
Suppose a coupon of 4.75% (assume that each bond pays interest annually) and the actual yield to maturity (YTM) of 4.95%.
Suppose that an investor holds the bond of the above question for two years expecting that by the end of this period the YTM will have dropped to 2.6%, which was the YTM of the Portuguese sovereign debt of the same maturity in April 2014. What is the anticipated return of the investment (to calculate the overall profit you should take into consideration both the capital gains from the fall in the YTM and the coupons that have been paid)?