QUESTION 22 You purchase a 9-yesir bond at $07 por $100 par value that payn a 7.6% coupon por annum. Further assume that bond pays coupon semi-annually, and coupons can be reinvested at 4.1% semi-annually for first 6 years. The yield to maturity of a 2-years comparable bond after 5 years in 6%. If you hold the bond for 6 years, what will be your total retum? Ploano write the answer in four decimal place and NOT PERCENTAGE. OLIESTINN92 Question You purchase a 9-year bond at $99.62 per $100 par value that pays a 7.3% coupon per annum. Further assume that bond pays coupon semi-annually, and coupons can be reinvested at 3% semi-annually for first five years. The yield to maturity of a 4-years comparable bond after five years is 7%. If you hold the bond for 5 years, what will be your total return? Answer: Example Coupon interest: Interest-on-interest: Sale price after five years: 10 $3.65 = $36.50 $3.65 ((1.03) 10 - 11 /0.03 - $36.50 = $5.34 $3.65 $100 + $101.03 (1.035) (1.035) $36.50 + $5.34 +$101.03 = $142.87 15142.87/$99.62]/10 - 1 = 0.0367 semiannually or 7.34% annually Total future value: Total return: DUR . Ai %AP %Ai AP - Duration(Ai/(1 + i)]P CF(t) (1 + i) CF *(1 + i) CF(t) *(1 + i) PV of the security D Modified duration = Macaulay's duration/(1+i) AP/P 2 - Duration/(1+i)]Ai Effective Annual Return = (1+"-1 Future value of coupons + interest on coupons ((1+r) - 1) Holding period return = CF -1 bo - CF (1-a+r)d) + + +r) B. Discount rate ide: idr Pr - P. 360 PA h C. Money market 360-day rate, i360 P.-P, 360 P. h D. Bond equivalent 365-day rate, 136 Oribe ibe P.-P. 365 P. E. Effective annual interest rate: i 1+ 1 365/h) Modified duration= Macaulay's Duration 1 +r Call Price-P.. Effective Duration - Po(r+ -) P.--P+ Por-r-) MVL DGAP = WADA - WADLX MVA Ar AEVE = -DGAP MVA 1 + r GAP=RSAS - RSLS 365/h i = - [14