An investor with a $5-$year investment horizon is considering purchasing a $15-$year $7\%$ coupon bond for $$913\mathrm{.}54.$ This means the YTM today is $8\%.$ The investor expects to be able to reinvest the coupon interest payments at an annual interest rate of $6\%($Please note that $6\%$ is a nominal rate, $3\%$ is the effective semi$-$annual interest rate that we should adopt$)$ and that at the end of the planned investment horizon, the then $10-$year bond will be selling to offer a YTM of $20\%.$

If the total cash inflow $($from the reinvestment of the first $10$ coupon payments and the projected bond sale price$)$ at the end of year $5$ is $$847\mathrm{.}85.$

What is the Total Return?

Hint: you need to use $10$ period $($six$-$month$)$ to calculate the semi$-$annual effective interest rate, then double it to get TOTAL RETURN. It should be a NEGATIVE number since $$847\mathrm{.}85<$ $$913\mathrm{.}54.$

The above is an example that investment in FIXED INCOME security is not risk free. The negative return is largely resulted from a much higher YTM of the bond in the first $5$ years. This may resulted from the overall increase of the interest rate, and$/$or the company specific credit risk $($the much worse competitive environment$).$

Answers:

$2\mathrm{.}02\%$

$1\mathrm{.}01\%$

$-0\mathrm{.}74\%$

$-1\mathrm{.}49\%$