Question

Suppose an investor can purchase a 20 year, 5% coupon bond that pays interest semi annually and the price of the bond is 97%. The Par Amount is $100. The yield to maturity is 5.95%. Assume the investor can reinvest the coupon payments at an annual rate of 3%. The bond is only held for 5 years and sold at 89%. Compute the following:

What is the Total Coupon plus Interest on Interest in Dollars?

What is the (Total Interest on Interest) component in Dollars?

What is the Total Rate of Return (in percent) on this bond when sold after 5 years?

What is the Total Accounting Rate of Return (semiannual equivalent) in percent?

Answer 1

Par Amount	100
Coupon	5%
Coupon semi annually	5	Multiply Coupon by face value
Total	50	Since semi annually mutiply by 10 i.e 5 Yrs *2
Rate	3%
FV of interest	$57.32	Use the formula --FV=PV(1+r)^n
PV	50
Interest on interest	$7.32
Selling price	89
Purchase price	97
Loss	-8
Total return	50.84%
ARR	57.44%
ARR semi annually	28.72%	Divide ARR by 2