A portfolio manager buys $20M par value after a 15-year bond, promised to pay 10% interest rate per year. The issue makes the payment twice a year over the 15 years of the bond

The reinvestment rate of the coupon payment is 8% per year, first payment occurs 6 month.

(take 1M every 6 months, 5% interest rate, 30 periods because of semiannual period)

Question:

1. What is the rate of return on investing in $20M of bond?

2. Given the reinvestment rate is 8% per year, is the bond underpriced? Or overpriced? Or correctly priced in a no arbitrage market?

3. At what price will the bond trade at 8%

4. Given your answer to Q3, what will be the growth rate of the investment in the bond?

5. Given your answer to Q3, what will be the economic profit of investing in the bond?

6. What will be the current yield and capital gain rate by investing in the bond?