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  3. 1 suppose that an investor with a five year invest

1 Suppose that an investor with a five year investment horizon is considering purchasing a...

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1 Suppose that an investor with a five year investment horizon is considering purchasing a seven year 7 coupon bond selling at par The investor expects that he can reinvest the coupon payments at an annual interest rate of 9 4 and that at the end of the investment horizon two year bonds will be selling to offer a yield to maturity of 11 2 What is the total return on this investment The investor has a five year investment horizon and purchases a seven year 7 coupon bond for 1 000 The yield to maturity for this bond is 7 since it is selling at par The investor expects to be able to reinvest the coupon interest payments at an annual interest rate of 9 4 and that at the end of the planned investment horizon the then two year bond will be selling to offer a yield to maturity of 11 2 Hint using semiannual interest to compute total return for a bond on p 61 C 7 1 000 2 Step 1 to apply eqn 3 7 coupon interest interest on interest C 1 r r Step 2 utilizing eqn 2 7 2 8 projected sale price PV coupon payments PV par value 1 1 r r M 1 r Step 3 sum up 1 2 as the total future dollars Step 4 to obtain the semiannual total return use the formula Step 5 Double step 4 for the total return total future dollars purchase price of bond

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