You are planning to buy a semi-annually paid corporate bond with a seven-year maturity that pays...

 

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You are planning to buy a semi-annually paid corporate bond with a seven-year maturity that pays 7 percent coupon interest. The bond is priced at $108,500 per $100,000 par value. You expect to sell the bond in two years when a similar-risk five-year bond is priced to yield 7.2 percent annually to maturity. a) Assuming that you can reinvest all cash flows at an 8 percent annual rate (4 percent semiannually), calculate your expected total return over the two-year holding period. (6 points) b) Suppose, instead, that you plan to sell the bond after 2 years when you expect that the reinvestment rate will be 6% APR. Calculate the expected sale price of the bond and your expected total return. (5 points) c) Explain why the two calculated total returns differ. (3 points) You are planning to buy a semi-annually paid corporate bond with a seven-year maturity that pays 7 percent coupon interest. The bond is priced at $108,500 per $100,000 par value. You expect to sell the bond in two years when a similar-risk five-year bond is priced to yield 7.2 percent annually to maturity. a) Assuming that you can reinvest all cash flows at an 8 percent annual rate (4 percent semiannually), calculate your expected total return over the two-year holding period. (6 points) b) Suppose, instead, that you plan to sell the bond after 2 years when you expect that the reinvestment rate will be 6% APR. Calculate the expected sale price of the bond and your expected total return. (5 points) c) Explain why the two calculated total returns differ. (3 points)

Answer rating: 100% (QA)

Given Information Par Value of Bond 100000 Maturity 7 years or 14 halfyears Purchase Price P0 108500 ... View the full answer