A two-year bond with par value Par = $10,000 and annual coupons was issued at par....
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A two-year bond with par value Par = $10,000 and annual coupons was issued at par. Its yield to maturity at issuance (t = 0) was YTMo = 8%. Investor A purchased the bond at t = 0. A will receive one coupon a year later (t = 1) and reinvest that coupon at a certain reinvestment rate R. When the bond Imatures at the end of the second year and the investor tallies all the cash flows resulting from the entire investment (the coupon reinvested the year before, the coupon received just now, and the par value also received just now), A's realized compound yield on this investment is y'realized = 0.0835 = 8.35%. To the nearest basis point, what was the reinvestment rate rR? Hint: Recall that the realized compound yield realized, bond price P, par value Par, bond coupon rate C, and the life of the bond T are connected by the following formula: T P(1 + y realized) = Par +CΣ(1+1R)¹-¹ 1=1 A two-year bond with par value Par = $10,000 and annual coupons was issued at par. Its yield to maturity at issuance (t = 0) was YTMo = 8%. Investor A purchased the bond at t = 0. A will receive one coupon a year later (t = 1) and reinvest that coupon at a certain reinvestment rate R. When the bond Imatures at the end of the second year and the investor tallies all the cash flows resulting from the entire investment (the coupon reinvested the year before, the coupon received just now, and the par value also received just now), A's realized compound yield on this investment is y'realized = 0.0835 = 8.35%. To the nearest basis point, what was the reinvestment rate rR? Hint: Recall that the realized compound yield realized, bond price P, par value Par, bond coupon rate C, and the life of the bond T are connected by the following formula: T P(1 + y realized) = Par +CΣ(1+1R)¹-¹ 1=1
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Answer rating: 100% (QA)
To find the reinvestment rate R we can use the formula for the realized compound yield TP1 yrea... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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