A newly-issued ten-year option-free bond is valued at par on June 1, 2000. The bond pays an annual coupon of 8.0%. On June 1, 2003, the bond has a yield-to-maturity of 7.1%. Assume that the first coupon is reinvested at 8.0% and the second coupon is reinvested at 7.0%. The future bond price of the bond on June 1, 2003, is closest to: a. 100.00% of par. b. 105.40% of par. c. 104.80% of par. d. 104.90% of par.
my choice c. Reasoning: pmt 8, i/y 7.1; n 7, fv 100, cpt pv = 104.833 (signes omitted)
C is right. can u explain the steps/thought process you took? Why is n 7? What about the reinvestment of 7% and 8% for both coupons?
7 = years remaining to maturity (10 yr bond, 3 yrs later) the reinvestment of the coupons doesn’t matter for the current price of the bond because they’ve already been paid and reinvested
I’m an idiot, this question is insanely easy lol, thanks guys
Welcome! I feel the same sometimes, guess need to sleep : )
Yeah man, it’s pretty simple, sometimes they just add a sh*t load of extra words to confuse you. It got me thinking as well but if you look at it again, it’s just a simple ordinary bond question.