Three years ago, an investor purchased a 1,000 face, 4.50%, semi annual coupon bond with 7 years to maturity priced to yield 6.5% for 888.94. The reinvestment income that must be generated over the life of the bond for the investor to realize a yield of 6.5% is closest to: A. 72 B. 76 C. 80 D. 83

B

Calculations please

total coupon payments = 14*22.50 = 315 total coupon payments including interest: N=14 I/Y=3.25 PMT=22.5 FV=391.02 therefore, reinvestment income = 391 - 315 = 76 ans B

Thanks a lot Bluey

B

Yield = 6.5% (compounded semi annually) means the bond must earn 3.25% per 6 months. Periods = 7 * 2 = 14 1.0325^14 = 1.5648 888.94 * 1.5648 = 1391.02 < Face Value + Coupon Payments + Reinvestment Income should equal this. Face Value = 1000 Coupon Payments = (45/2) * 14 = 315 1391.02 - 1000 - 315 = Reinvestment Income Reinvestment Income = 76