10. Suppose that an investor has 8 years investment horizon. The investor is considering a 20-year...

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10. Suppose that an investor has 8 years investment horizon. The investor is considering a 20-year semi-annual coupon bond selling at par and having a coupon rate of 10%. The investor expectations are as follows: The first 6 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 7%. . The remaining semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at a 11% annual interest rate. Investor believes that the required return on a 12-year bond of this quality at the end of the investment horizon will be 12%. (a) Calculate the total return on bond equivalent basis? (b) What is the total return on effective rate basis? 10. Suppose that an investor has 8 years investment horizon. The investor is considering a 20-year semi-annual coupon bond selling at par and having a coupon rate of 10%. The investor expectations are as follows: The first 6 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 7%. . The remaining semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at a 11% annual interest rate. Investor believes that the required return on a 12-year bond of this quality at the end of the investment horizon will be 12%. (a) Calculate the total return on bond equivalent basis? (b) What is the total return on effective rate basis?

Answer rating: 100% (QA)

To calculate the total return on bond equivalent basis we need to consider the reinvestment of coupon payments and the bonds price appreciation or dep... View the full answer