Question

Example: Suppose you buy a 30-year, 7.5% (annual payment) coupon bond for $98 0 (when its yield to maturity is 7.67%) and you plan to hold it for 20 years. Your for ecast is that the bond's yield to maturity will be 8 % when it is sold and the reinvest ment rate on the coupons will be 6%. What is realized compound return?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

в Current Price of Bond Par value of Bond Coupon rate Current YTM Years until maturity YTM in 20 years Bond Value in 20 years $980.00 $1,000.00 7.50% 7.67% 30 8% $966.45 Reinvestment rate of Coupon Annual coupon payment Value of Coupon in 20 years 6% $75.00 $2,758.92 Total Proceed from in 20 years $3,725.37 Absolute Return in 20 years 280.14% Realized Compound Return 6.90%

Cell reference -

980 Current Price of Bond Par value of Bond Coupon rate Current YTM Years until maturity YTM in 20 years Bond Value in 20 years 1000 0.075 0.0767 30 0.08 =PV(C7,10,-C4*C3,-C3,0) 8 9 10 11 Reinvestment rate of Coupon Annual coupon payment Value of Coupon in 20 years 0.06 =C3*C4 =FV(C10,20,-C11,,0) 12 Total Proceed from in 20 years =C8+C12 Absolute Return in 20 years =C14/C2-1 Realized Compound Return =(1+C16)^(1/20)-1 20

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.