In June 1982, when the yield to maturity on long- term bonds was about 14 percent, many observers were projecting an eventual decline in these rates. It was not unusual to hear of customers urging portfolio managers to “lock in” these high rates by buying some new issues with these high coupons. You recognize that it is not possible to really lock in such returns for coupon bonds because of the potential reinvestment rate problem if rates decline. Assuming the following expectations for a five-year bond bought at par, compute the total realized compound yield (without taxes) for the bond below.
Coupon....... 14% (assume annual interest payments at end of each year)
Maturity..... Five years.
One- year reinvestment rates during:
Year 2, 3: 10%
Year 4, 5: 8%

  • CreatedJune 21, 2015
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