As part of a capital raising exercise, Immaturity Inc. sold 20-year, 6% semi-annual coupon bonds with...

As part of a capital raising exercise, Immaturity Inc. sold 20-year, 6% semi-annual coupon bonds with a face value of $1,000 at a discounted price of $950 each. a) Calculate the yield on these bonds b) Suppose an investor that buys these bonds reinvests the coupon payments received. How much in total would the investor have at maturity if he reinvested his received coupon at: (i) 4.30%, compounded semi-annually?

Expert Solution


Yield on the Bond:
Face Value	$1,000
Semiannual Coupon	$30.00	(1000*0.06)/2
Number of Coupon payment	40	(20*2)
Discounted Price	$950
Semi annual Yield on the Bond	3.224%	(Using RATE function of excel, Nper=40, Pmt=30, PV=-950, FV=1000
Annual Yield	6.45%	(3.224%*2)
Yield on these bond	6.45%

Reinvestment of Coupon at 4.30%
Semi annual interest rate	2.15%	(4.30/2)
Amount investment semiannually	$30
Future value of coupon amount reinvested	$1,872.17	(Using FV function of excel with Rate=2.15%, Nper=40,Pmt=-30
Maturity Amount of Bond	$1,000
Total amount the investor will have	$2,872.17

jeff jeffy answered 2 years ago

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