Suppose that the manager of a tax-exempt portfolio is considering investing $10,000 in any one of the two 7-year bonds:

(1) 11% semi-annual coupon bond selling at par ($100).

(2) Zero-coupon bond selling at $52.48 (per $100 par value and semi-annual compounding).

Also, suppose that the bonds have the same credit quality rating and that the portfolio manager plans to hold either bond until maturity. 

What is the coupon payment reinvestment rate (break-even rate), that makes the manager indifferent between buying the zero-coupon bond and buying the coupon bond?

Answer rating: 100% (QA)

To determine the coupon payment reinvestment rate breakeven rate that would make the manager indiffe... View the full answer