An investor purchases 8% coupon bond at 104.2 per 100 of par value. The coupon payments...

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An investor purchases 8% coupon bond at 104.2 per 100 of par value. The coupon payments are reinvested at 7%. Refer the below given data to calculate the investor's return/horizon yield when the bond is held to maturity and when the bond is sold after 3 years Details fo the bond: Face Value settlement date maturity date Annual coupon rate coupon frequency Bond Price (flat) maturity(t) in years Annual 4 3 2 1 0 Future value of coupons at t = 5 Horizon Yield is Case 1: Holding to Maturity Time remaining to maturity Coupon payments ? future value of coupons at t=3 Time to maturity after 3 years 2 ? 1? o? Cash flow ? 1? 2? ? ? ? ? 100 18/02/20 18/02/25 8.00% Case 2: Selling before maturity after 3 years, when the bond is sold, the yield to maturity is =6.50% time remaining to maturity coupon payments Reinvestment rate 7.00% 7.00% 104.2 5 Present value of remaining coupons and future value at t=3 Horizon Yield ?? Formula Bar Reinvestment rate 7.00% 7.00% 7.00% 7.00% 7.00% Yield to maturity The reinvestment rate changes (increases or decreases ) compared to YTM because of Capital loss Re investment income All of the above 6.50% 6.50% Future value ? ? ? ? ? ? Future value ? ? ? ? future value ? ? ? An investor purchases 8% coupon bond at 104.2 per 100 of par value. The coupon payments are reinvested at 7%. Refer the below given data to calculate the investor's return/horizon yield when the bond is held to maturity and when the bond is sold after 3 years Details fo the bond: Face Value settlement date maturity date Annual coupon rate coupon frequency Bond Price (flat) maturity(t) in years Annual 4 3 2 1 0 Future value of coupons at t = 5 Horizon Yield is Case 1: Holding to Maturity Time remaining to maturity Coupon payments ? future value of coupons at t=3 Time to maturity after 3 years 2 ? 1? o? Cash flow ? 1? 2? ? ? ? ? 100 18/02/20 18/02/25 8.00% Case 2: Selling before maturity after 3 years, when the bond is sold, the yield to maturity is =6.50% time remaining to maturity coupon payments Reinvestment rate 7.00% 7.00% 104.2 5 Present value of remaining coupons and future value at t=3 Horizon Yield ?? Formula Bar Reinvestment rate 7.00% 7.00% 7.00% 7.00% 7.00% Yield to maturity The reinvestment rate changes (increases or decreases ) compared to YTM because of Capital loss Re investment income All of the above 6.50% 6.50% Future value ? ? ? ? ? ? Future value ? ? ? ? future value ? ? ?

Answer rating: 100% (QA)

Case 1 Holding to Maturity To calculate the future value of coupon payments at each time period we use the formula for compound interest Future Value ... View the full answer