Question

Today you buy a Wal-Mart bond with $10,000 par value and $555 semi-annual coupon payments. The bond matures in 11 years. You plan to hold the bond to its maturity. Wal-Mart will send you a check for the coupon payment every six months, with the first check arriving six months from today. At the maturity of the bond, Wal-Mart will send you a separate check for $10,000. You assume that Wal-Mart will not go bankrupt before the bond matures.

Over the life of the bond, the bond price will fluctuate, perhaps between $9,000 and $11,000. Thus, each coupon payment will be too small to reinvest in this Wal-Mart bond. Instead, you plan to deposit your coupons in a savings account that you expect will pay an APR of 2.15% per year, with semi-annual compounding.

What is the future value of your investment?

Round your answer to the nearest dollar.

Answer 1

Today you buy a Wal-Mart bond with $10,000 par value and $555 semi-annual coupon payments. The bond matures in 11 years. You plan to hold the bond to its maturity. Wal-Mart will send you a check for the coupon payment every six months, with the first check arriving six months from today. At the maturity of the bond, Wal-Mart will send you a separate check for $10,000. You assume that Wal-Mart will not go bankrupt before the bond matures.

Over the life of the bond, the bond price will fluctuate, perhaps between $9,000 and $11,000. Thus, each coupon payment will be too small to reinvest in this Wal-Mart bond. Instead, you plan to deposit your coupons in a savings account that you expect will pay an APR of 2.15% per year, with semi-annual compounding.

What is the future value of your investment?

Round your answer to the nearest dollar.

Par Value of Bond = $10,000

Semi-annual coupon payments to be received at the end of every 6 months = $555

We will re-invest the coupon payment in saving account as soon as you receive the coupon payment.

Calculating the Future Value at the end of 11 years of coupon payment reinvested:-

Where, C= Periodic Coupon payments = $555

r = Periodic Interest rate = 2.15%/2 = 1.075% (semi-annual compounding)

n= no of periods = 11 years*2 = 22

Future Value = $13,692.22

Future value of coupon reinvestment is $13,692.22

- Future Value of investment along with par value at the end of 11 yaers = $13,692.22 + $10,000

= $23,692.22

So, the future value of your investment is $23,692