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We have an annual coupon bond with a face value of$1000​. It has 14 years to...

We have an annual coupon bond with a face value of$1000​. It has 14 years to maturity, and with a price of $79. Now the coupon rate on the bond is 7​%. If we can reinvest the coupon at a rate of 3.5​% per​ year, then how much money do would we have if we were to hold the bond to​ maturity?

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Expert Solution

Hello,

My solution is as below. Total money in had with $2,167.39

  • Assuming we are at T0, we will receiving 14 coupon of $70 each and they will be re-invested on the same day at 3.5 per year (cumulative)
  • Also, it has been assumed that coupon are paid annually, In case of semi-annual payments, calculations will differ
  • Since it has been mentioned that we already have bond, current value of $79 is not taken into account.
  • I have solved it in excel. Please see attached snapshots.

jeff jeffy answered 6 months ago
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