Question

Compute the total dollar return earned from a bond's coupon interest and the reinvestment of coupons from issue date to end of period 3.

Term to Maturity: 2 years

Par Value: $1,000

Coupon Rate: 7.30%

Yield to Maturity remains at 7.30% for the entire length of the bond maturity (2 years)

The bond pays semi-annual coupon payments

$39.21

$113.55

$37.83

$109.50

Answer 1

The bond has 2 years to maturity. Since, it is a semi-annual bond, there will be 4 coupon payments.

Per period coupon payment = 7.3%/2 * 1000 = $36.5

C1 = 36.5. This is received after 6 months, when 1.5 years would be remaining to maturity. So, this coupon would be reinvested for 1.5 years (3 semi-annual periods).

Hence,

C2 = 36.5. This is received after 12 months, when 1 year would be remaining to maturity. So, this coupon would be reinvested for 1 year (2 semi-annual periods).

Hence,

?

C3 = 36.5. This is received after 18 months, when 0.5 year would be remaining to maturity. So, this coupon would be reinvested for 0.5 year (1 semi-annual period).

Hence,

?

C4 = 36.5. This is received after 24 months or at the maturity, with face value, when 0 year would be remaining to maturity. So, this coupon's reinvestment return can't be added.

Hence, ?

Now the question asks us total dollar return earned from a bond's coupon interest and the reinvestment of coupons from issue date to end of period 3 - which is till C3`

Hence, answer is $113.55