Question
Suppose that an investor has 6 years investment horizon. The investor is considering a 13-year semiannual coupon bond selling at par and having a coupon
Suppose that an investor has 6 years investment horizon. The investor is considering a 13-year semiannual coupon bond selling at par and having a coupon rate of 9%. Par value is $1000.
The investor expectations are as follows:
The first 4 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 8%,
The last 8 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at a 10% annual interest rate,
The required market interest rate on 7-year bonds at the end of the investment horizon is 10.6%.
What is the total return for this investor?
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