4.1.5 Don purchases a 1000 par value 10-year bond with 8% semiannual coupons for 900. He...

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4.1.5 Don purchases a 1000 par value 10-year bond with 8% semiannual coupons for 900. He is able to reinvest his coupon payme

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Answer 1

Answer #1

CASE 1: ASSUMING 8% IS ANNUAL COUPON RATE
Using financial calculator
Step 1: Reinvested coupons value
N=10*2=20
PMT=-8%*1000/2=-40
I/Y=6%/2=3%
PV=0
CPT FV=1074.81

Step 2: Find yield
N=10*2
FV=1074.81+1000=2074.81
PMT=0
PV=-900
CPT I/Y=4.265%

Hence, yield=4.265%*2=8.53%

CASE 2: ASSUMING 8% IS SEMIANNUAL COUPON RATE
Using financial calculator
Step 1: Reinvested coupons value
N=10*2=20
PMT=-8%*1000=-80
I/Y=6%/2=3%
PV=0
CPT FV=2149.6300

Step 2: Find yield
N=10*2
FV=2149.63+1000=3149.63
PMT=0
PV=-900
CPT I/Y=6.46%

Hence, yield=6.46%*2=12.93%

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