An investor is investing in a bond with a 6-year maturity with 6% annual coupon at PAR. The investor plans to invest the bond for 4 years before selling it off. Assume further that in the following years interest rates follow a downtrend, so that the coupon received in year 1 is invested for three years at 4.5%; the coupon received in year 2 is reinvested for two years at 3%, and the coupon received in year 3 is reinvested for 1 year at 2%. 4 years later, the YTM of the bond is expected to increase to 8%. What’s the realized compound yield (RCY) in year 4.

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Calculating Realized Compound Yield RCY for the Bond 1 Calculate Coupon Payments Fa... View the full answer