A 5 percent semi-annual pay bond with a par value of $1000 matures in 10 years and is selling for $925.61, for a 6 percent yield to maturity. Over the life of the bond, the reinvestment income that must be earned in order to realize the 6 percent yield is closest to: A) $157.63 B) $171.75 C) $232.02 D) $246.14 According the answer key the answer is 925.61 (1.03)^20 -1000-500=$171.75. I was hoping that someone could walk me through the logic behing what is happening in the aeformentioned equation…I know that is a bit of an ambiguous question but any help would be greatly appreciated. Thanks so much… TheDubs
N = 10*2 I/Y = 6/2 FV = 1000 PV = -925.61 PMT = 25 Now just forget about the Present value and Future value of the Bond for a while and just focus on coupons So Now, N = 10*2 I/Y = 6/2 FV = dont care PV = dont care PMT = 25 FV (of coupons would be) = 671.759 Actual Coupon worth (w/o interest compounding) = 20*25 = 500 So difference should be the Interest on Coupons, right? 671.759 - 500 = 171.759
Thanks so much that was a great help.!
Dinesh, Thanx for the clarification, but i was trying to follow your logic esp in the way you found 671.759. I have been trying all possible combinations, peharps am just tired due to lack of sleep,… Would you show the formula? Thanx
> According the answer key the answer is 925.61 > (1.03)^20 -1000-500=$171.75. What they do, and what I do, is that you start by having to pay $925.61. Had you wanted to earn a 6% return seminanually for 10 years on that, you’d have: $925.61 * 1.03^20. Now subtract off the $1000 you get at maturity and $25 you get each half-year, that’s how you get the answer.