# Zero bond return 2

A 30-year 8% bond is purchased at par and held for 10 years. It is then sold at 98 for a YTM of 8.20%. The reinvestment rate on the coupons is 10%. The true annualized return on the bond over the 10-year period is closest to: a. 8.00% b. 8.20% c. 8.56% d. 9.45%

not a zero bond q, but it’s ok

pick one between c and d.

C

and if you want to do math, this is what i’d do, compute a FV for the annuity of the bond coupons at 10% and subtract the ocupons. that’ll give you reinvestment income. Once you have that, and you know your return from coupons and capital gain (2) you do another PV -> FV computation for 10 yrs and see how much the rate is.

c

I get 8.69

I get 8.47

FV: 230 PV = 100 N =10 i = ?

8.56%

This is what I did: FV: ? PV = 0 N =10 i = 10 PMT = 8 —>FV=127.50 ((127.50+98)/100)^.1=1.0847

n = 20 and i= 5 inn your math, you’ll get FV = 132 then you add 98 to it.

second pepp. its semi annual (he still guessed the answer lol)

pepp Wrote: ------------------------------------------------------- > n = 20 and i= 5 inn your math, you’ll get FV = > 132 > then you add 98 to it. i don’t think this is a semiannual pay bond

The trick here is to realize that coupons are not being reinvested at the YTM rate, so you should strip the coupons and treat them as separate cash flows growing at 10%. This will get you \$132.26. Then the FV will be \$132.26 + \$98, with no payments.

vbcfa Wrote: ------------------------------------------------------- > pepp Wrote: > -------------------------------------------------- > ----- > > n = 20 and i= 5 inn your math, you’ll get FV = > > 132 > > then you add 98 to it. > > > i don’t think this is a semiannual pay bond for exam all bonds are semiannual unless otherwise noted.

It is semiannual . You could also guess it (eliminate some) since the turn should be higher than its YTM because of the higher reinvest rate. But 9.45% is a possible return.

This is my problem. on most questions, I am able to elinate 2 choices. Then left with 2 choices, and i am looking at them… so my chance of passing is 50-50% slightly more, because a few of the question I know exactly the answer. And slightly less cuz a few of the questions I do not have a flying clue. So again 50-50%

Question… So when they say an 8% bond they are referring to the coupon? When they say the reinvestment rate on a coupon is 10% thats is the I/Y? Re: Zero bond return 2 Posted by: vbcfa (IP Logged) [hide posts from this user] Date: June 2, 2008 09:45PM This is what I did: FV: ? PV = 0 N =10 i = 10 PMT = 8 —>FV=127.50 ((127.50+98)/100)^.1=1.0847