An investor has the following options available to them: * They can buy a 10% semi annual coupon, 10-year bond for $1,000. * The coupons can be reinvested at 12%. * They estimate the bond will be sold in 3 years $1,050. Based on this information, what would be the average annual rate of return over the 3 years? A) 11.5%. B) 13.5%. C) 10.0%. D) 9.5%.

A

Even I answered the same. Other answers can be eliminated. Can you please explain with the computational part?

coupon payments = 300 capital gain loss = 0; reinvestment income = 48.76 so you get (348.76/1000)^.33 = 10.37 I’d say C is the closest. is the answer.

They buy for $1000 and sell for $1050, so there is a CG

The actual answer is A. But I did not get the exact answer as 11.5. Can someone help me deduce it?

whatever, I am fed up. I’ve got about 10 questions wrong in a row on FI.

Arbitrage approach. 1) they buy the 10-year note 2) reinvest the coupon: PMT=50, N=20, I/Y=6, FV=1000 and you obtain PV=885 Arbitrage profit: 1000-885= 115 and hence 11.5% This is what I think…however not sure 100%

this is the logic. 1000 * 1.115^3 = 1386 At the end of three year you get 1348.76 hence A.

But it says you get $1050 when selling and you purchases for 1000 so you get $1398.77 overall

strangedays Wrote: ------------------------------------------------------- > Arbitrage approach. > 1) they buy the 10-year note > > 2) reinvest the coupon: > > PMT=50, N=20, I/Y=6, FV=1000 and you obtain > PV=885 > > Arbitrage profit: 1000-885= 115 and hence 11.5% > > This is what I think…however not sure 100% What, how did you assume that reinvesting the coupon has a FV of 1000?? Am I smoking here. The PV = 1000 is given in the problem. You have PMT = 50, N = 6, I = 6, FV = 348.76, of which 300 is simply coupon payments. and you sell the security for 1000 at the end of 3 yrs. So don’t know what i am missing here in this discussion.

jk86 Wrote: ------------------------------------------------------- > But it says you get $1050 when selling and you > purchases for 1000 so you get $1398.77 overall The last 1050, 50 is yoru coupon for the 6th term.

They estimate the bond will be sold in 3 years $1,050 ^^^ in the problem

Yes, when the bond sells for the 6th term, the coupon is part of hte selling price. thats how bonds trade.

Ok I understand it more if that’s what it’s meaning, but that’s not how I was reading it

Whenever there is ambiguity its a crappy questions. CFAi won’t ask.

amit_edge Wrote: ------------------------------------------------------- > An investor has the following options available to > them: > > * They can buy a 10% semi annual coupon, > 10-year bond for $1,000. > * The coupons can be reinvested at 12%. > * They estimate the bond will be sold in 3 > years $1,050. > > Based on this information, what would be the > average annual rate of return over the 3 years? > A) 11.5%. > B) 13.5%. > C) 10.0%. > D) 9.5%. That’s one wicked inverted yield curve. You get 12% for 3 years, but 10% for 10 yrs… I’m not buying any 10 yr bonds.

pepp Wrote: ------------------------------------------------------- > Yes, when the bond sells for the 6th term, the > coupon is part of hte selling price. > > thats how bonds trade. Not in the US. All bonds are quoted clean and the accrued interest is on the invoice.

JoeyDVivre Wrote: ------------------------------------------------------- > amit_edge Wrote: > -------------------------------------------------- > ----- > > An investor has the following options available > to > > them: > > > > * They can buy a 10% semi annual coupon, > > 10-year bond for $1,000. > > * The coupons can be reinvested at 12%. > > * They estimate the bond will be sold in 3 > > years $1,050. > > > > Based on this information, what would be the > > average annual rate of return over the 3 years? > > A) 11.5%. > > B) 13.5%. > > C) 10.0%. > > D) 9.5%. > > > > That’s one wicked inverted yield curve. You get > 12% for 3 years, but 10% for 10 yrs… I’m not > buying any 10 yr bonds. Joey, I really didnt realize that! it is really true…“the answer it is always more simple that how the problem appear” (I use this also as a rule of life). Having said that, I think I will crash my head on the window I have in front of me. I C-A-N-T M-A-K-E THIS STUPID MISTAKES. I REALLY CANT.

That’s one wicked inverted yield curve. You get 12% for 3 years, but 10% for 10 yrs… I’m not buying any 10 yr bonds." MARKET IS EXPECTING A RECESSION, according to term structure theories.