Asked by Alaina Mazur on Mar 10, 2024

Verified

A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually) . The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years?

A) 7.37%

B) 7.56%

C) 8.12%

D) 8.54%

A) 7.37%

B) 7.56%

C) 8.12%

D) 8.54%

Coupon Rate

The annual interest rate paid by a bond, expressed as a percentage of the bond's face value.

Expected Annual Compound

A projection of the return that an investment is expected to yield on an annual basis, taking into account the effect of compounding.

Bond Market Analyst

A financial professional who evaluates and interprets bond market data to forecast bond price movements and interest rate trends.

- Examine the relationship between interest rate variations and their effects on bonds' price fluctuation and yield.

Verified Answer

SA

Shelby Arellano

Mar 10, 2024

Final Answer :

A

Explanation :

Explanation: FV5 of the reinvested coupons is $366.61.

Calculator entries are N = 5, I/Y = 6, PV = 0, PMT = −65, CPT FV 366.61

Value of the bond at time 5 is $954.46.

Calculator entries are N = 15, I/Y = 7, PMT = −65, FV = −1,000, CPT PV 954.46

Total future value at time 5 = $366.41 + $954.46 = $1,320.87

PV0 = $925.50

($925.50)(1 + r)5 = $1,320.87; r = 7.37%

Or N = 5, PV = −925.50, PMT = 0, FV = 1,320.87, CPT I/Y 7.37

Calculator entries are N = 5, I/Y = 6, PV = 0, PMT = −65, CPT FV 366.61

Value of the bond at time 5 is $954.46.

Calculator entries are N = 15, I/Y = 7, PMT = −65, FV = −1,000, CPT PV 954.46

Total future value at time 5 = $366.41 + $954.46 = $1,320.87

PV0 = $925.50

($925.50)(1 + r)5 = $1,320.87; r = 7.37%

Or N = 5, PV = −925.50, PMT = 0, FV = 1,320.87, CPT I/Y 7.37

Explanation :

FV5 of the reinvested coupons is $366.61.

Calculator entries are N = 5, I/Y = 6, PV = 0, PMT = −65, CPT FV 366.61

Value of the bond at time 5 is $954.46.

Calculator entries are N = 15, I/Y = 7, PMT = −65, FV = −1,000, CPT PV 954.46

Total future value at time 5 = $366.41 + $954.46 = $1,320.87

PV0 = $925.50

($925.50)(1 + r)5 = $1,320.87; r = 7.37%

Or N = 5, PV = −925.50, PMT = 0, FV = 1,320.87, CPT I/Y 7.37

Calculator entries are N = 5, I/Y = 6, PV = 0, PMT = −65, CPT FV 366.61

Value of the bond at time 5 is $954.46.

Calculator entries are N = 15, I/Y = 7, PMT = −65, FV = −1,000, CPT PV 954.46

Total future value at time 5 = $366.41 + $954.46 = $1,320.87

PV0 = $925.50

($925.50)(1 + r)5 = $1,320.87; r = 7.37%

Or N = 5, PV = −925.50, PMT = 0, FV = 1,320.87, CPT I/Y 7.37

## Learning Objectives

- Examine the relationship between interest rate variations and their effects on bonds' price fluctuation and yield.