You invest in a 10 year bond with a face value of R1 000 paying semi-annual coupons at a rate of 10% per year. The bond is currently trading at a return (yield to maturity, bond equivalent yield, BEY) of 6% per year. The next coupon is payable six months from now.

c. What would the value of the coupons that you are going to receive over the next three years be at the end of the three years if you can invest this at 4% per year (bond equivalent yield, BEY)?

d. What will be the total value of the investment (bond plus coupons plus interest on coupons) be after three years in this instance?

e. What return (bond equivalent yield, BEY) will you make on your investment in this instance?

f. Why is this less than the 6% return (yield to maturity, bond equivalent yield, BEY) that the bond is trading at?

g. Suppose that you succeed in investing the coupons at a 6% return (bond equivalent yield, BEY). Repeat the calculations. What would be the return that you would then make on your investment over the three year period?

h. Suppose that interest rates increase immediately after you have made this investment. You succeed in investing the coupons at a 10% return (bond equivalent yield, BEY). Repeat the calculations. What would be the return that you would then make on your investment over the three year period?