An investor is considering the purchase of a 20-year 7% coupon bond selling for $816 and a par value of $1,000. The yield to maturity for this bond is 9%.

a. What would be the total future dollars if this investor invested $816 for 20 years earning 9% compounded semiannually?

b. What are the total coupon payments over the life of this bond?

c. What would be the total future dollars from the coupon payments and the re- payment of principal at the end of 20 years?

d. For the bond to produce the same total future dollars as in part

a, how much must the interest on interest be?

e. Calculate the interest on interest from the bond assuming that the semiannual coupon payments can be reinvested at 4.5% every six months and demonstrate that the resulting amount is the same as in part d.

AppendixLO1