3 years ago, an investor purchased $1000 face, 4.5% semiannual coupon bond with 7 yrs to maturity priced to yield 6.5% for $888.94. What is the reinvestment income that must be generated over the life of the bond for the investor to realize a yeld of 6.5%? The answer is $76. I’ve got PV today=$930.53, but not sure how to derive the reinvestment income at a proper reinvestment rate from that. Thanks in advance.
888.94 is what you paid for the bond. If it earned 6.5% per annum for the rest of its life, what would it become? 888.94 * 1.0325^14 = 1391.02 What do you actually get by investing in the bond? 1000 + 22.5 * 14 = 1315 (Coupon payments for 14 periods + face value) This bond was earning less than 6.5% per annum. Therefore, How much should you reinvest? 1391.02 - 1315 = 76$
Nice question, i dont think i’'ve come across this type before? Is it perhaps covered in volume 6? I sure hope it is…because this at that easy.
Thanks alot CP. Yes, it’s in Volume 6 Exam 1.