Suppose that an investor with a five-year investment horizon is considering purchasing a seven-year 7% coupon bond selling at par. The investor expects that he can reinvest the coupon payments at an annual interest rate of 9.4% and that at the end of the investment horizon two-year bonds will be selling to offer a yield to maturity of 11.2%. What is the total return on this investment?

Extra information:

Draw the cashflows of the 7 year bond. Using Par Value of 100, investors pays 100 and receives 14 coupon payments and Par Value of 100 at the end of 7 years.

Part 1: As the investor has hold the bond for 5 years, he will have received 10 coupon payments. With an reinvestment rate of 9.4% (s.a. compounding), what is the coupons plus interest on coupons at the end of 5 years?

Part 2: At the end of year 5, what is the remaining life of the bond? With a yield to maturity of 11.2%, what is the value of the bond then?