An investor borrows an amount at an annual effective interest rate of 7% and will repay all interest and principal in a lump sum at the end of 10 years. She uses the amount borrowed to purchase a 1000 par value 10-year bond with 10% semiannual coupons bought to yield 8% convertible semiannually. All coupon payments are rein-vested at a nominal rate of 6% convertible semiannually. Calculate the net gain to the investor at the end of 10 years after the loan is repaid.

Answer rating: 100% (QA)

To calculate the net gain to the investor at the end of 10 years we need to determine the cash flows from the bond investment and from the loan repayment and then calculate the total cash inflows and ... View the full answer