Q:
A:
A 6.4% coupon bond that is expected to mature in five years is currently trading at 96.825. If the annualized reinvestment rate is expected to be 5.8%, what will this bond's effective annual total return be?
A) 6.63%
B) 7.17%
C) 7.11%
D) 6.39%
A) 6.63%
B) 7.17%
C) 7.11%
D) 6.39%
The correct answer is: C)
Step 1: Future value of reinvested coupons.
PMT =
3.20; n = 10; I = 2.9%
Therefore, FV = 36.516
Step 2: Total FV at maturity = (FV of coupons + Par)
= 36.516 + 100
= 136.516
Step 3:
Calculate Holding Period Return
= 136.156/96.825  1 = 40.99%
Step 4: Calculate the effective annual total return
(1.4099)^{1/5}  1 = 7.11%
or,
(1.4099)^{1/10}  1 = 3.495% (this is the effective 6month yield)
Therefore, (1.03495)^{2}  1 = 7.11%
MORE FAQS

A 10year, 8% coupon bond is currently trading at 98.5 of par ...

What is the difference between yield to maturity and the coupon rate?

How do I calculate yield to maturity of a zero coupon bond?

What is the most common solvency ratios used in fundamental analysis?

How do debit spreads impact the trading of options?

What types of fees apply to checking accounts?

How does a bond's coupon rate affect its price?

How can I calculate a bond's coupon rate in Excel?

Can the marginal propensity to consume ever be negative?

If an investor has a required rate of return of 10% on a 20year zero ...

How does a bond's coupon interest rate affect its price?

What is the size of the average retirement nest egg?

What is Warren Buffett's annual salary at Berkshire Hathaway?

Which United States Presidents have run the largest budget deficits?

Which country has the most gold?

Human capital vs. physical capital: What is the difference?

Can moving to a higher tax bracket cause me to have a lower net income?

How did the financial crisis affect the banking sector?

Do beneficiaries pay taxes on life insurance?

How do I become a Chartered Financial Analyst (CFA)?
RELATED FAQS

A 10year, 8% coupon bond is currently trading at 98.5 of par ...
The correct answer is: a) In your approved calculator, key the following amounts and solve for i: FV = 97.5 PMT = 4 n = 8 ... 
What is the difference between yield to maturity and the coupon rate?
Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... 
How do I calculate yield to maturity of a zero coupon bond?
Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ... 
What is the most common solvency ratios used in fundamental analysis?
Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... 
How do debit spreads impact the trading of options?
Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... 
What types of fees apply to checking accounts?
Learn about the difference between a bond's coupon rate and its yield to maturity, and how the par value, coupon rate and ...
RELATED TERMS

Bunny Bond
A type of bond that offers investors the option to reinvest coupon ... 
Coupon Rate
The yield paid by a fixed income security. A fixed income security's ... 
Reinvestment Risk
The risk that future coupons from a bond will not be reinvested ... 
Current Coupon Bond
A bond with a coupon rate that is within 0.5\% of the current ... 
Coupon Bond
A debt obligation with coupons attached that represent semiannual ... 
Effective Yield
The yield of a bond, assuming that you reinvest the coupon (interest ...