Question
An Investor purchases 8% coupon bond at 104.2 per 100 of par value. The coupon payments are reinvested at 7%. Refer the below given data
An Investor purchases 8% coupon bond at 104.2 per 100 of par value. The coupon payments are reinvested at 7%. Refer the below given data to calculate the Investors return/Horizon yield when the bond is held to maturity and when the bond is sold after 3 years.
Details of bond:-
Face value=Rs 100 Settlement Date=18/2/2020 Maturity Date=18/2/2025 Annual Coupon rate= 8% Coupon Frequency=Annual Bond Price(Flat) =Rs 104.20 Maturity (t) in years=5
Case 1:-Holding to Maturity
Time Remaining to Maturity 4 3 2 1 0 Coupon Payments 8 8 8 8 8 Reinvestment Rate 7% 7% 7% 7% Future Value=? Future Value of Coupons at t=5
Horizon Yield=?
Case 2:- Selling before Maturity
After 3 Years, when the bond is sold YTM=6.50%
Time Remaining to Maturity 2 1 0 Coupon Payments=? Reinvestment Rate 7% 7% Future Value=? Future Value of coupons at t=3 =?
Time to Maturity after 3 years 1 2 Cash Flow=? YTM= 6.50%, 6.50% Future Value=? Present Value of Remaining coupons and Future Value at t=3 =?
Horizon Yield=?
The Reinvestment rate changes increases or decreases compared to YTM because of:-
1) Capital loss 2) Reinvestment income 3) All of the above
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