sort me out (see reading 29 page 28, exhibit 8). coupon rate 7.5% annually, yield to maturity 7.5%, par value=bond price 9,642,899, new yield 11%, accumulated value after six months 14,298,739 what is the coupon in dollar terms, interest on interest and the total return I can’t get how they got the figures and I am just refusing to be ashamed?..afraid?.. a concerned?
they used a spreadsheet Think of it like any other bond. 3.75% semi-annually x par value = semi-annual $ coupon This coupon is reinvested so they just say coupon 1,2,3,4,…,n x reinvestment rate to maturity is the interest on interest
Because: Coupon receive = $361,608 everry six month is invested at 5.5% (11/2). Therefore, you will receive: PMT= 361,608.71, n=10, i= 5.5 =$4,655,803 +your principal of $9642899 =$14,289,729.
tibwa, thanks but where from i. the coupon of 3,616,087 for each of the periods, ii. the interest on interest iii. the total return figures?
Let see: Face value: $9,642,899 invest for 5years = 10 period because of semi-annual rule at gaurantee return of 7.5% therefore the expected value will be. $9,642,899 * ( 1+0.075/2)^10 = $13, 934,413 Total coupon for the overal investment period is : (0.075/2)*$9,642,899 =361,609. Multiply this semi-annual coupon by 10 since you recieve this amount 10 time: 361,609*10 = $3,616,087. Overall interest for the all period is $13,934,413-9,642,899= $4,291,514 Interest on interest is: Total interest - coupons =$4,291,514-$3,616,087 =675,427. Total return is 7.5% because you assume that rate did not change. Now if rate change immediately after you made the investment, you total returns will change because interest on interest will change. This is where reinvestment risk come in play. You total return will increase if rate increase as is the case for increase of 11% and decrease if rate decline as is the case for the 4% given in the problem. What will not change is the coupoun because you already get into the contract. Is that help?
thanks tibwa