# Question

You have just purchased a five- year maturity bond for $ 10,000 par value that pays $ 610 in coupon interest annually ($ 305 every six months). You expect to hold the bond until maturity. Calculate your expected total return if you can reinvest all coupon payments at 5 percent (2.5 percent semiannually). Suppose, instead, that you plan to sell the bond after two years when you expect that a similar- risk three-year bond will be priced to yield 5.2 percent to maturity. Calculate the expected sale price of the bond and your expected total return using the same reinvestment rates. Explain why the two calculated total returns differ.

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