Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Teaching Public Budgeting And Finance

Authors: Meagan M. Jordan, Bruce D. McDonald III

1st Edition

1032146680, 978-1032146683

More Books

Students also viewed these Finance questions