4. Suppose that an investor has a 6-year investment horizon. The investor is considering a 20-year semi-annual coupon bond selling at par and having a coupon rate of 9%. The investor expectations are as follows:
The first 4 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 8.5%;
The next 4 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 9.5%.
The last 4 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 9.0%.
The investor also expects that the discount rate on 14-year similar-credit quality bonds at the end of her investment horizon is 10%.
What is the YTM of the bond? What is the total return? Please explain the difference, if any.
(b) Now, suppose that the bond is callable at the end of period 10 by the issuer and call price is $1,045. Assuming that the bond is called at the end of period 10 and reinvestment rates remain the same as stated above, what price will you offer for the bond at date 0 in order to generate a 9% total return on your investment
