Suppose that you purchase a 25 year, 10% per annum coupon rate bond when its yield to
Question:
Suppose that you purchase a 25 year, 10% per annum coupon rate bond when its yield to maturity is 7% per annum compounded semi-annually. Par value is $10,000. Coupons are paid every six months and the next and upcoming coupon is in exactly six months. You buy the bond today and plan to hold it for exactly 5 years (you will sell the bond in exactly five years immediately after receiving the coupon at that time). You expect to reinvest coupons at a rate of interest of 7% per annum compounded semi-annually. You do not expect yields in the bond market to increase or decrease over your five year holding period. Yields for 20 years bonds are no different from yields for 25 year bonds.
Find your annualized holding period rate of return on your investment compounded semi-annually.
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe