Good night,

I have this exercise from my investment class but I can't understand it. Could you explain it to me step by step? thank you.

Q5 The following information pertains to a substitution swap You currently hold Aa coupon bond with Holding period Coupon rate Yield (%) 25 years 8% 10% As a swap candidate, you are considering Aa bond with 25 years Holding period Coupon rate Yield (%) 8% 10.50% Assume a reinvestment rate of 10% Compounded one-year workout period 2 times per year Candidate Current Bond Bond $817.44 Dollar investment 80 80 Coupon 2.2 2 r on one coupon 782.33 819.23 Principal value at year end 864.53 901.23 Total accrued 83.79 Total gain Gain per invested dollar Realized compound yield Current price: PO = 40* (PVIFAr/2, 2n) + 1,000*(PVIFr/2, 2n) P current 40*(18.2559) + 1,000* (.0872) = 817.44 P candidate 40* (18.5728) + 1,000* (.0774) = 780.34 Year-end prices Pcurrent 40*(18.0772) + 1,000*(.0961) = 819.23 P candidate 40*(17.4139) + 1,000*(.0858) = 782.36 Current bond % gain [901.23 - 817.44] / 817.44 .102503 [1+.102503)/2 - 1 = .050001 2 (.050001) .10001 10 % Realized yield per period Realized compound yield Candidate bond % gain [867.53 -780.34]/ 780.34= .107889 1/2 [1+.107889)2 - 1 .052563 Realized yield per period Realized compound yield 2 (.052563) = .105126 = 10.5126% 10.5126-10.000 1 51.25 basis points Swap value PVIFA= [1- 1/(1+k) ""]/k PVIF = 1/(1+k)m 18.255925 0.0872037