Question

Suppose that an investor has 8-year investment horizon. The investor is
considering a 15-year semi-annual coupon bond selling at $990 (par value is
$1000) and having a coupon rate of 4%. The investor expectations are as follows:
• The first 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4%,
• the first 8 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4.25%,
• the last 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at a 3.75% annual interest rate, and
• the required market interest/discount rate on 7-year bonds at the end of the
investment horizon is 3.6%.
A) What is the YTM of the bond?
B) What is the total return on bond equivalent basis from investing in the
bond?
C) Please explain your result carefully.

Answer 1

A)	YTM Calculations
	Price	990
	Par value	1000
	Period	30
	Coupon	20
	YTM	4.09%	RATE(30,20,-990,1000,,)*2
B)	No. of period	Coupon	Reinvestment rate	Final value
	15	20	4%	26.92
	14	20	4%	26.39
	13	20	4%	25.87
	12	20	4%	25.36
	11	20	4.25%	25.20
	10	20	4.25%	24.68
	9	20	4.25%	24.17
	8	20	4.25%	23.66
	7	20	4.25%	23.17
	6	20	4.25%	22.69
	5	20	4.25%	22.22
	4	20	4.25%	21.75
	3	20	3.75%	21.15
	2	20	3.75%	20.76
	1	20	3.75%	20.38
	0	20	3.75%	20.00
			Total	374.37
	Total return		38.825%	(374.37+1000-990)/990