Question

3. An investor with a 5-year investment horizon is considering the purchase of 30-year 6%coupon bond selling for $850 and a par value of $1000. The vield to maturity for the bond is 7.2%. Suppose the investor faces a reinvestment rate of 5% per year and anticipates selling the bond in 5 years to yield 6% on the 25-year remaining maturity in 5 years. Calculate his total return from the investment. (17 pt.)

Answer 1

The investor horizon is 5 years He purchased the bond at $850 dollar 2 60 Coupon 60 60 60 At time period 1 he will receive the coupon of 60 and will reinvest it at 5% for four years Income from reinvestment of coupon 60*(1+0.05)^4 +60*(1+0.05)^3 + 60*(1+0.05)^2 + 60*(1+0.05) + 60 331.54 at the end of five year,the yield on bond is expected to be 6% Future value =1000 Coupon 60 Number of payments = 25 Yield rate = 6% Use the financial calculator to calculate the price price = 1000 Total return = (1000-850 +331.54)/850 *100 56.65 %